Trade-offs and global warming

If fighting climate change is inconvenient and expensive, it won't happen: A modest proposal to make it easier, from Fortune's Cait Murphy.

By Cait Murphy, Fortune assistant managing editor

NEW YORK (Fortune) -- Want to silence a dinner party? Here's one way, at least in blue cities and states. Allow everyone to vent and moan over global warming - those poor penguins! Then ask your fellow guests: So what have you done about it? Ouch.

Frankly, I haven't had the nerve to try it; I like having friends, and I am in no position to throw stones, though I, too, fret about the fate of the penguins and accept that global warming is an issue worth taking seriously.

But it does occur to me that the discussion of global warming is simultaneously overblown and under-serious. Let's face it: If we really, truly believed that New York City was going to be under water in less than 50 years, we would move heaven and earth to prevent that from happening. But we don't, so we don't.

Put aside the public gassing and look at how people act. The conclusion is inescapable that people do not consider global warming a matter of urgency, but a problem for the fairly distant future. They are therefore reluctant to modify the way they live now. (And this is true for Europe, too, which is much more fussed about climate change - and where emissions are rising.) Here's an indicative statistic: Sales of hybrids have been rising fast in the United States - and in 2006 accounted for all of one of every 64 vehicles sold.

To put it baldly: To the extent that dealing with global warming is a) expensive and b) inconvenient, it isn't going to happen any time soon.

Perhaps that sounds unduly cynical, but I'll change my mind when carpooling becomes chic and the chattering classes start to take the bus to the Hamptons.

The problem with this procrastination is that the longer the delay, the more abrupt the economic shock down the line; far better to start doing the sensible, modest incremental things that are the key to getting to grips with the problem in the long run. The role of politics, in an ideal world, is to create a framework in which such choices get made. That is exactly what is not happening in the United States, where the idea that there might just be trade-offs to be made is apparently too toxic to be mentioned in polite company.

Two quick examples: The more a politician talks about U.S.-produced bio-fuels, the less serious he or she is about either oil dependency or global warming. Why? Because it takes a lot of energy to grow, move, and convert corn into energy. The net effect is close to nil; if you doubt that assessment, check out this recent study by the Canadian government, which found that a 10 percent blend of corn-based ethanol would reduce emissions by about 1 percent. An MIT study earlier this year also concluded that determining the energy balance between corn-based ethanol and conventional fossil fuels was so close that it was really just a matter of definition.

Similarly, when you hear an elected official blither on about the scandal of high gas prices, that's another sign that global warming is way down the list of priorities. Sticker shock at the pump does more to increase conservation than any other policy (as plummeting sales of pick-ups and SUVs attest, to Detroit's dismay).

These are trade-offs - you cannot have both cheap gas and a serious global warming policy; you cannot both subsidize U.S. farmers and have efficient bio-fuels.

Unserious describes the policies of the major U.S. presidential candidates. There is, to be honest, little to choose between them. All favor a combination of tax breaks and/or new federal funding for renewable energy; higher mandates for domestic biofuels like ethanol; and research into clean coal and carbon sequestration. Barack Obama wants a gradual increase in mileage standards; Hillary Clinton to tax oil company profits to force them to invest in alternative energies; John McCain to open new nuclear plants.

Notice how finicky most of these things are, how marginal, how utterly lacking in ambition - and how rich in pork and possibilities to meddle. Notice, too, that the only time the "T" word is mentioned (as in tax), it is in the form of credits, rebates, abatements - anything but what a tax actually is - the way that governments raise revenue.

That is way more than ironic because taxing the sources of global warming is the most efficient and cheapest way to deal with the problem.

Fortune has made this case before, in the aftermath of 9/11. The idea still makes sense, and is gaining traction (outside Capitol Hill, that is). Paul Anderson, former chairman and CEO of Duke Energy (Charts, Fortune 500), one of the nation's largest utilities, has publicly called for a carbon tax, telling Rolling Stone that "It gives you the flexibility to make intelligent investment choices."

Greg Mankiw, chairman of the Council of Economic Advisers from 2003-05, and no one's idea of a radical, has put together the Pigou Club, which he calls an "elite group of pundits and policy wonks" in favor of a higher gas tax. Among the strange bedfellows who agree: Paul Krugman, Martin Feldstein, Gary Becker, Al Gore, George Schultz, Joe Stiglitz and Thomas Friedman.

Senator Chris Dodd (D-Conn.) is the only national politician who has touched the idea, calling for a "corporate carbon tax." Then he undercuts the whole point by suggesting it could be designed in such a way that costs would not be passed on to the consumer. (They would: All taxes, everywhere, all the time, since the beginning to time, are paid by both consumer and producer. That is right up there with supply-and-demand as a fundamental of Econ 101.)

The case for a global warming tax is that by raising the price of using GHGs (of which carbon dioxide is the most important), relative costs shift toward cleaner options - the economic advantage of coal, which is cheap but carbon-intensive narrows compared to, say, biomass, which is a little more expensive to produce, but less costly to the environment. Over time, individuals and industries can adjust.

The key here is "over time." A tax based on the amount of carbon (or other GHG) emitted is, by its nature, a gradual way to shift the economy onto a cleaner track. It imbeds the reality that dealing with global warming requires taking into account the trade-offs that people are (and are not) willing to make - and then tipping the scale toward the desired end.

Is gradualism a cop-out? Not at all. Remember, for a start, just how resistant people are to changing their habits; smart policy recognizes this as a fact of life, and deals with it. Abrupt change is not an option.

Starting now, modestly but seriously, is a hard-headed, realistic and essentially optimistic view. And yes, it can work.

Our air and water are pristine compared to the early 1970s not because we shut down all industry or other uses, but because the U.S. government imposed standards, then tightened them over time. Result: Beaver in New York City for the first time since the Jefferson presidency. A carbon tax would mimic that dynamic; over time, it would nudge coal plants to burn cleaner and eventually give way altogether to nicer substitutes.

Another example: green building. It is expensive and sometimes close to impossible to retrofit older buildings to what are known as LEED (Leadership in Energy and Environmental Design) standards. But to build from scratch to get LEED-certified adds perhaps 2 percent in construction costs - a figure that is recouped quickly in lower operating costs and higher quality. That is why more and more new buildings are meeting the standard; thus, the building stock, over time, is greening. And what does this have to do with global warming? Buildings account for 40 percent of emissions.

If all greenhouse-gas emissions ended today, the world would still be on a warming track, because of the accumulation already in the atmosphere. Therefore, big, sweeping cuts - which are not going to happen, anyway - would not even be that effective. The goal should be to move in an irreversibly lower-carbon direction. What that takes is not hot air from the stump, but adopting smart, efficient, long-term policies that slow the growth of emissions and then, perhaps around mid-century, see emissions begin to fall.

"Please tax me to encourage a long-term shift away from harmful emissions" is not much of a bumper sticker, but it is both honest and the best policy. And, over time, it may just fill that clean-energy bus to the Hamptons. Top of page

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.