One Person's Externalities...

Patrick Doherty

December 12, 2005

Not surprisingly, last week's meetings in Montreal to look beyond the Kyoto Protocols have produced little tangible progress. Headlines are calling the pace of debate on climate change "glacial." A large part of the reason for this is official American intransigence by the Bush administration. But a good part of the blame can be placed on the shoulders of progressive advocates who have thus far failed to recognize the political power of the issues underlying climate change.

Environmental contrarians Michael Shellenberger and Ted Nordhaus have explored the issue to some extent, with their provocative piece called, "The Death Of Environmentalism." In a more recent commentary, here in TomPaine.com , the green provocateurs re-stated their core thesis:

...The stalemate over addressing global warming speaks not to the failure of Blair or Bush but rather that of environmentalism and the politics of limits. Global warming did not have to be, a priori , an “environmental” issue.  It was made so by environmentalists who understood global warming originally not so much as an impending global crisis that needed to be addressed by any means necessary but rather as a powerful new argument for restricting activities (e.g., driving cars and burning fossil fuels) that they already wanted to restrict. As such, the solutions to global warming were, from the very start, conceived of as limitations and restrictions—the approach that lies at the heart of the Kyoto protocol and virtually every other effort to address global warming.

There is a different way to think and act on global warming. Truly addressing the ecological crisis will, by all accounts, require a dramatic transformation of the global energy economy.  In that transformation lies the possibility of enormous economic growth and the potential to lift living standards around the world. Economists have known for decades that investments in innovative new energy sources, from solar to biomass and biodiesel to wind, as well as energy efficiency, have a multiplier effect on the economy.

But Shellenberger and Nordhaus have also pulled their punches and failed to see the even larger opportunity waiting for America around the corner. Really fixing the global energy economy will require more than just federal investment in renewable energy and efficiency technologies. As this week's Economist notes, "every form of energy is subsidized." Adding new subsidies for new technologies won't dramatically weaken the fossil fuel industry. It won't really fix our trade imbalance with China. And it certainly won't help with our ballooning federal deficits. Really fixing the energy economy means finally correcting one of the major theoretical flaws of modern economics: the problem of externalities.

Externalities are the convenient dodge that economists have used to ignore the sources and destinations of the energy and material that is required by their markets. They assume, for example, that energy extraction has only economic costs. That means they can ignore the nearly $300 billion cost of the war in Iraq from the cost of a barrel of Persian Gulf Crude. It means they can ignore the cost of mountaintop removal coal mining to Appalachian ecosystems and communities. And it has meant that they can ignore the cost of global warming, mercury poisoning and MTBE contamination. It's not their problem.

But externalities are the people's problem. Therefore, sooner or later, it will become the government's problem. More responsible governments have  recognized the logic of the "precautionary principle," given that the threat of global warming, as Tony Blair's science adviser recently wrote, is more serious than terrorism. Global warming is the ultimate externality, caused by 150 years of fossil fuel combustion. Sadly, in Washington, it may take the loss of another major U.S. city (or, more likely, losing New Orleans again). It may be the rapid cooling of Northern Europe spiking energy prices here at home. Eventually, we will be forced to act.

Shellenberger and Nordhaus recognize that there is another way to change our behavior. Instead of being driven by threat or risk, we could be driven by the scale of the opportunity. But from where I sit, their decision to advocate for expansive federal subsidies rather than ending the externality problem has grossly limited the political power of their prescription.

First off, we need to realize that it is the government that creates the rules, builds the infrastructure and enforces the contracts that define the modern economy. Our present economy is unsustainable because of the rules that make resources cheap (subsidies) and labor expensive (income tax, private health care).

Finally fixing the externality problem means reversing that economic formula. Tomorrow, TomPaine.com will be publishing an op-ed by World Resources Institute's Craig Hanson, talking about how the concept of tax shifting can make such a future happen. I'll let Craig deal with the specifics and focus here on the political power.

Imagine the political party that tells Americans that anyone making under $300,000 pays no income or payroll tax; that their commutes will start getting shorter, their communities safer and their health care guaranteed. Imagine the political party who can also promise businesses a free-er market where innovation and not corrupt lobbying makes the difference between profit and loss. Imagine a political party that can show America how we're going to dig our way out of our deficits, reduce our strategic vulnerability and drain the swamp of inequality that produces terrorists.

Fixing the externality problem leads us in this direction. When prices include the cost of abating the mercury or sequestering the carbon, or treating the children made ill by formaldehyde, and consumers have more money in their hands, then the markets will be a progressive force in our society. Imagine a future where the tree-lined pedestrian neighborhood is a fast transit ride away from the office. Imagine a future where the beautiful, locally grown, organic groceries are cheaper than the pesticide and hormone laden imported variety. Imagine a future where work is valued more than waste.

Even The Economist is figuring it out. In this week's issue, they write, "...Many governments, striving to reduce carbon emissions, are now embracing policies that promise more enduring and politically palatable support for renewable energy than subsidies: 'externalities' pricing."

Climate change, energy insecurity, federal deficits, the rise of China. All these things make small-scale problem solving impossible. As I said last week, it's essential for progressives to get into the fight—before we lock into a half-fast, subsidy-driven Band-Aid of a policy.