by Iain Murray
March 9, 2009

Originally published in The DC Examiner
The President’s budget aims at restructuring American energy production to reduce greenhouse gas emissions to 1990 levels by 2020.  His primary policy vehicle for achieving this is a “cap-and-trade” scheme that will essentially tax greenhouse gas emissions, making energy that generates them more expensive.  However, the program is so ambitious as to stretch the bounds of plausibility.  If America is to reduce greenhouse gas emissions substantially, prolonged recession may be the only way to do it.

The amount of greenhouse gases an economy emits is determined by three factors – population, gross domestic product and something called carbon intensity.  All else being equal, a higher population emits more than a smaller population.  Similarly, a bigger economy emits more than a smaller economy.  This is because use of energy is at the root of most economic activity, and the most cost-effective energy source is fossil fuels.  However, if a large population, high GDP economy is able to reduce the amount of greenhouse gases it emits per unit of energy (reduce its carbon intensity, in other words), then it will reduce its total greenhouse gas emissions.

This is what the President’s policy banks on – that an increase in green energy will reduce the carbon intensity of the economy.  However, there are problems with this approach.  Because we assume America’s population and GDP will continue to grow (although there may be doubts about the latter at present), the reduction in carbon intensity will need to be significantly greater than it would need to be if population and GDP remained steady.

America’s emissions intensity declined a massive 54 percent from 1960 to 2005.  Industry had cleaned up its act, homes became more efficient, and cars poured less out through the exhaust pipe.  Yet overall emissions doubled.  Why?  Because the US population grew substantially and per capita GDP increased by a massive 169 percent. This means that the rate of reduction in carbon intensity required is much greater than the nation has ever achieved.

Even nations where there has been transformative change in energy production, such as Britain and France, have been unable to sustain the sort of reduction in emissions intensity required.  Britain moved from coal to gas in the early 1990s, reducing its emissions intensity by 2.3% each year from 1992 to 1998.  Since then, its decarbonization rate has decreased by a full percentage point.  France, which generates 80% of its electricity from nuclear power, has only been able to achieve a 1 percent decrease in intensity over the past 15 years.

America, starting from a much higher base in terms of energy use, will have to reduce its emissions intensity by about 2 percent each year for an entire decade just to meet the President’s targets, which are in turn much less stringent than those that would have been required by the Kyoto treaty (and therefore significantly less stringent than demanded by environmentalists).  This level of decarbonization is unlikely to be achieved by the investments signified by the budget and stimulus act, which will, if sustained, merely double alternative energy generation to around 1 percent of all energy use over the next few years.

We should also note that virtually every country that has agreed to make emissions cuts under the Kyoto treaty (most did not) has failed to do so.  The exceptions are the Eastern European countries, which did so because their smokestack industries, inherited from Soviet days, have collapsed, at great economic cost.

So how can we possibly meet the President’s target?  If the economy continues to suffer, this will, perversely, make meeting the targets easier, but it will take a sustained depression to get there. The only alternative that allows for a realistic rate of carbon intensity reduction and some economic growth is a reduction in the US population.  This, however, is not likely to sit well with the President’s allies in the immigration lobby.
Finally, it should be noted that the tax on energy use is to be used to pay for the President’s Making Work Pay “tax cut.”  If emissions intensity does reduce considerably, the effect will be to reduce government revenues and create a funding gap for the tax cut.  There is actually therefore a disincentive on government to encourage emissions, just as there is a disincentive on state governments that receive money from tobacco sales to seriously discourage smoking.

It is still possible that significant decarbonization can take place, but it will require a much more transformative effort than has been signaled in the President’s actual energy plans – as opposed to his rhetoric – to date.  One thing is for sure, such a transformation will come at a much higher cost than any economy has ever been prepared to pay.  In a recession, that is an inconvenient truth no-one will want to hear.

Iain Murray is Senior Fellow in Energy, Science and Technology at the Competitive Enterprise Institute (http://www.cei.org) in Washington DC