Which Comes First, the Chicken or the Egg? Innovation and Regulation in the Climate Change Debate

In the struggle to control greenhouse gases, one debate has been which should come first, innovation or regulation. The Bush administration, of course, came down firmly on the side of innovation. It invested money – though many argued, not enough – in developing energy efficient technologies or means of controlling greenhouse gas emissions, but it fought to end against regulation of CO2 as a pollutant.

From a theoretical point of view, the Bush position was certainly inconsistent with traditional economic theory – as well as with off-stated conservative positions on issues. Once one accepts that greenhouse gas emissions lead to climate change, i.e., in economic terms, that there is a negative externality associated with energy generation, then the economic answer should be to put a price on the externality, so that economic entities that generate greenhouse emissions have to internalize the full cost of those emissions. 

Moreover, conservatives – and some liberals – don’t necessarily assume that government knows best which technologies will prove the winners in the market. Why should we believe that government will fund the right technologies? Thus, these twin arguments go, government should set a price on carbon and get out of the way. This is called technology-forcing, and it has a solid history in environmental regulation.

Recently, however, Michael Shellenberger & Ted Nordhaus, who certainly have solid environmental pedigrees, advocated for spending on innovation in advance of imposing regulation on carbon emissions. In fact, they state that “cap and trade regulations, which would cap greenhouse gas emissions and allow companies to trade reductions, cannot work in the U.S.–and are not working in Europe.” They also argue that, in a serious recession, deficit spending on innovation in energy efficiency and greenhouse gas control makes more sense than imposing significant new taxes.

I have to say that I’m open to persuasion on this. My default position is that I would rather have the market than the government make bets on technology (which is not to say that government funding doesn’t have a role, particularly in fundamental research). However, the complexities of greenhouse gas regulation truly are terrifying and the potentially adverse impacts on the economy are, to put it mildly, non-trivial, if we get it wrong.

Unlike those who supported the losing vice-presidential candidate in the recent election because she is like them, my position is firmly that I hope that President Obama understands this stuff better than I do, and I sure hope he gets it right.

Your thoughts?

One thought on “Which Comes First, the Chicken or the Egg? Innovation and Regulation in the Climate Change Debate

  1. Not sure Shellenberger and Nordhaus are good sources on particular policy strategies as opposed to, say, eye-catching broadsides aimed at mainstream environmentalism as a whole. That said, I think you get it right on the carbon conundrum when you invoke the age-old problem of negative externalities.
    While there will always be debate about the correct value/price of carbon per unit, we’ve certainly got enough well-trained economists out there — environmental, Chicago School and otherwise — to come close. More important, as we evolve our economy along a sustainability/triple bottom line vector, the internalization exercise is one we need to start getting used to. At bottom, the best way to solve our environmental challenges, to say nothing of our social ones, is to change the utility function, to expand it to include the “true” cost, however imperfectly determined, of the goods and services we produce/consume. It’s that simple, and complicated. No less than our entire economic order is at stake.
    As former Exxon Vice President Oystein Dahle put it, “Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it has not allowed the market to tell the ecological truth.”

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