Cap and Trade, Carbon Footprint, Carbon Tax, Carbon Standards, Kyoto Treaty, Copenhagen, Environment
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Friday December 11, 2009
Weekend Edition
Today's Zinger:
Nothing Happens Without Change, and Change Is The Enemy Of Stability.
The Morning Briefing:
There is heated disagreement over whether we should impose carbon taxes on businesses that create greenhouse gases. Because the science of global climate change has been brought into question, many say that it is not needed and will only hurt our economy.
We are reacting with emotion and partisan sound bites, rather than thinking through the alternatives and implications. Zinger looks at global climate change and the errors that are being made by both sides of this argument. A cap and trade tax is not the answer. The government should set the standards and a timetable, then let the marketplace achieve the objectives. A tax on carbon is nothing more than an add-on cost to products that is imposed by the government that will passed on to consumers with the tax revenue a windfall to the government.
Who Said It:
“The Mediocre Mind Condemns That Which It Cannot Understand”
The Discussion:
As many of you may know, I used to teach statistics and economics. I would like to draw from that experience to make a point. In statistics, when you analyze the possibility of a future event based on making a critical decision along the way, there are two types of errors you can potentially make regarding the decision.
A Type I error is when you decide to do something when in fact you should not have done it. A Type II error is when you decide not to do something when in fact you should have done it. In statistics and economics the consequences of being wrong are measured in terms of these errors. The question for any decision is “which one is a more fatal error”, and how do you manage against that error.
Climate change is an example of such an event. We don’t know what the future holds for the earth’s temperature, but we can make educated guesses based on historical facts and assumptions. So, the argument goes that man is causing a warming of the earth’s temperature and we could experience radical and deadly consequences as a result of this temperature change. Some argue that the earth’s temperature has made sudden and dramatic changes in the past and it is not right to attribute this to man, especially when the science that led us to these conclusions has been compromised.
Let’s get back to the two types of errors (Type I and Type II). One error that could occur says that there really isn’t man made global climate change; the earth is going through a periodic warming trend and anything that we do will not change the outcome. The other error is that there really is a man made element to global warming and we may chose to do nothing about it. Rather than argue over whether global warming is man made or not, we should argue over the implications of being wrong.
Lets first consider the options:
If we decide to take decisive action and accept that man is a contributor to global climate change and it turns out not to be true (also called a Type I error).
- We will reduce our economic growth as we divert funds to environmental concerns and away from production of general goods and services.
- We will become less dependent on foreign sources for the fuel we need to sustain our economy.
- We will begin to create a platform for a new energy future that will be needed in the next 50 years due to declining fossil fuels.
If we decide to do nothing, and it turns out man is contributing to the global climate change:
- We will increase our domestic economic growth by approximately 1-2 percentage points.
- We will remain dependent on foreign countries for our energy, thus impacting our economy through higher oil prices in the future. That could cause severe economic hardship.
- We could experience mass population migration and most likely world wars as countries compete for land, resources, assets and safety.
This is obviously a simplified analysis of a complex issue, but it does raise legitimate concerns for any decision we make. The international community of climate scientists has said that the earth will warm 6 degrees in the current century. Six degrees is enough to kill most people through famine, disease, shortages of water, etc. Our international scientists believe that the man made component represent up to 2 degrees of the 6 degrees, therefore there is a component of global climate change that is naturally occurring. The voice of dissenting climatologists has been suppressed, but even they agree that the earth is warming, despite the fact that the past 10 years has seen a decline from the trend. Assuming their estimate of 4 degree natural increase is correct, then what are the implications. Famine and disease will still be a huge problem. Displacement of the world’s populations will still be a problem.
So the question is, which mistake would you rather make and what are the consequences of making the wrong decision? I certainly don’t know which is the truth, but I understand consequences. Personally, I would rather forgo a little economic growth than run the risk of further contributing to the potential for mass migration, disease and famine.
We should also ask the question, what if all of the scientists are wrong and the earth is really not warming? What if all of this is misinterpretation of the data? Well, we will forgo a little economic growth and we will move to energy independence more rapidly.
Anyone that has had cancer will fully understand this trade-off. When diagnosed with cancer there is usually a very tough decision to make. Do you go after an aggressive treatment that will have short-term consequences and life long implications or do you go for the less aggressive treatment and hope that it is enough. After making that decision myself, I know that going for the aggressive treatment is a no regrets strategy because if you survive, it may be because of the aggressive treatment. If it comes back, you can be assured that you have done everything that you could do. No regrets. If you chose to go for the less aggressive treatment and the disease comes back, you will constantly be thinking of what might have been, as you lay on your deathbed.
Our economy has a cancer. It is the dependence on fossil fuels. The earth may have a cancer as a result of the byproducts of using fossil fuels. Making the decision now to deal with this issue is a no regrets strategy, other than slower economic growth. (by the way, chemo slows you down as well). Let me continue the cancer analogy. You don’t give a massive dose of chemotherapy. It is given in stages and over time to allow the body to adjust and survive it. The same should be done with economic and environmental policy.
As Congress looks to stimulate the economy through energy related projects, and as they look at cap and trade as a tax on greenhouse gases to slow the potential for climate change, they must not make these jarring decisions but look at phasing in the decisions over time. This will allow businesses to plan appropriately and people to adjust to the new approach. Congress should create more incentives to move businesses to a new energy platform, rather than the same old tax and punish approach.
If you believe in man made global climate change then you are already on board with incentives to address carbon emissions. If you vehemently disagree that man has any responsibility for climate change, then you should be on board to a new energy platform for improved national security and for the long-term economic viability of our nation. If you believe mankind may contribute to global climate change but is not the driving force, or that the climate is actually cooling again and there is no need to take action on greenhouse gases, let me remind you that we as a nation are vulnerable to foreign country manipulation of oil and gas prices which could easily create long term damage to our economy and lead to a world war. If you believe we have plenty of oil and that the free market will take care of this, remember that we will essentially run out of oil within our children's lifetime, and it will most likely take decades to migrate to a new energy platform.
The Conclusion:
Congress should act with a phased approach that includes both incentives and emission standards to move us further towards energy independence and position mankind for sources of energy that will be needed in the future. In the meantime, we will have done everything that we should do to protect the planet that we live on and create greater national security for our nation and our economy.
I would not trust Congress with an influx of new tax revenue on carbon emissions. Rather, set the standards and let companies figure out how to get there, just like we have done with car emissions and gasoline mileage. The free market will determine the most cost effective way to achieve the goal and will price the cost into the final product, rather than taxing the product. Taxes that get passed along to consumers create no motivation to reduce the tax and the cost is blamed on the government rather than the company taking responsibility for the true cost of their products, which includes the environmental cost.
Who Said It?
“The Mediocre Mind Condemns That Which It Cannot Understand”
Albert Einstein
Today's ZingerToon:
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