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Greenhouse Policy Without Regrets: A Free Market Approach to the Uncertain Risks of Climate Change

Issue Analysis

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Greenhouse Policy Without Regrets: A Free Market Approach to the Uncertain Risks of Climate Change

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Due to uncertainty about climate change, and human contributions thereto, many policymakers call for “precautionary” measures to reduce the risk of global warming.  Such policies are characterized as “insurance.”  Such insurance against the risks of climate change can be achieved by either lessening the likelihood of change by reducing atmospheric concentrations of greenhouse gases through a combination of emission controls and carbon sequestration strategies, or by enacting mitigation measures to reduce the possible economic and ecological impact of a potential climate change.

No insurance policy is worthwhile if the cost of the premiums exceeds the protection purchased.  For greenhouse insurance to be worthwhile, it must either reduce the risks of anthropogenic climate change or reduce the costs of emission reductions designed to achieve the same goal, without imposing off-setting risks, such as those which would result from policies that slow economic growth and technological advance.  Currently proposed precautionary measures, such as the Kyoto Protocol, call for government interventions to control greenhouse-gas emissions and suppress the use of carbon-based fuels.  Such policies would impose substantial costs and yet do little, if anything, to reduce the risks of climate change.  Such policies cannot be characterized as cost-effective greenhouse “insurance.”

Rather than adopt costly regulatory measures that serve to suppress energy use and economic growth, policy makers should seek to eliminate government interventions in the marketplace that obstruct emission reductions and discourage the adoption of lower emission technologies.  Such an approach is a “no regrets” strategy, as these policy recommendations will provide economic and environmental benefits by fostering innovation and economic efficiency whether or not climate change is a serious threat.   While fear of global warming may prompt the enactment of these reforms, they merit implementation even if we have nothing to fear from climate change. 

A “no regrets” approach to climate change would incorporate the following policy measures, among others:

1)   Remove Regulatory Barriers to Innovation: Existing regulatory programs, and many environmental regulations in particular, create obstacles to the development and deployment of emission-reducing and energy-saving technologies.  Such regulations retard market-driven enhancements in efficiency and environmental performance that reduce energy use and emissions per unit of output.

2)   Eliminate Energy Subsidies: Government energy subsidies distort energy markets and energy-related investment decisions without producing off-setting returns.  The elimination of energy subsidies, in the United States and abroad, would result in a more efficient energy sector.

3)   Deregulate Electricity Markets: Local electricity monopolies and government utility regulation are significant barriers to innovation in the energy sector.  Electricity deregulation and consumer choice will create market opportunities for alternative energy sources and create further pressure for greater efficiency and innovation in the energy sector.

4)   Deregulate Transportation Markets: Airline travel is a rapidly increasing source of greenhouse gas emissions, yet air travel regulations prevent airlines from flying the most cost-effective and energy-efficient routes.  Allowing “free flight” could reduce per-flight energy use by as much as 17 percent.  Lowering regulatory barriers to improvements in other transportation sectors, such as road construction and management, could also produce substantial emission reductions.

The aforementioned policies may not significantly reduce total greenhouse-gas emissions, but they will reduce emissions per unit of output and spur greater technological innovation.  Were it ever demonstrated that emission controls were merited, the adoption of “no regrets” strategies today would make it easier to meet those goals without compromising existing standards of living.

The broader choice in climate change policy is between measures which constrain economic choices and thereby hamper economic growth and innovation, and those measures which free up society’s creative energies to spur innovation and enhance resiliency.  The human impact on the global climate system will always be indeterminate to some degree.  Unforeseen events, natural and human-induced, will occur.  For these reasons,  the best insurance policy is one that improves society’s generalized ability to cope with disasters, environmental and otherwise.  Freeing up key sectors of the economy, particularly those most reliant on energy, provides two forms of insurance: It spurs innovation in the energy sector, increasing energy efficiency and technological innovation, while also enhancing society’s overall resiliency.

A true “no regrets” approach to climate change is not greater government controls on economic activity, but fewer.  Economic growth, market institutions, and technological advance are often the most effective forms of insurance that a civilization can have.  Policy efforts aimed at freeing up the energy sector, and those segments of the economy that are most energy intensive, will produce both economic and environmental gains.  The economic gains will come from greater productivity and efficiency; the environmental gains from increased production per unit of energy expended or emissions released.  Such an approach will reduce whatever threat of human-induced climate change might exist while spurring technological innovation and economic development.  This strategy is the only approach to climate change that can be pursued with “no regrets.”