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Economist Joe Cortright on the cost of climate change

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Sunday, June 01, 2008

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BY JOE CORTRIGHT

Sometimes, getting advice from an economist is like getting driving directions from someone who’s always looking in the rearview mirror. On the straight-arrow roads in Kansas, their advice works fine; it’s only in the mountains, when your right front tire starts wandering in the gravel shoulder, do you realize that this kind of guidance will lead you horribly wrong.

Economists build models of the world based on observations taken from the road we’ve just traveled. You can think of these models as greatly simplified machines, like say a bicycle. Eric Fruits’ model of the relationship between greenhouse gas emissions and economic activity [Economix, April] is a “fixie” — one of those stripped-down one-speed messenger bikes, with no coaster arrangement, where the pedals turn in a permanently fixed ratio to the rear wheel. Eric’s “fixie” model assumes that the only way to reduce greenhouse gas emissions is to throttle economic activity.

The claim that the relationship between carbon emissions and economic output is fixed is demonstrably wrong today. Most of the rest of the developed world creates GDP by producing about 40% less carbon per unit of output than we do. To believe that this ratio cannot   be changed in the future is just wacky.

The problem with the “fixie” bicycle as metaphor for policy is that it misses the fact that the economy can change gears. The lesson of pollution control efforts over the past four decades is that we have enormous ability to change the recipes for producing goods and services of all kinds in ways that reduce pollution. Per mile traveled, the average car today emits about 1% of the amounts of hydrocarbons, nitrogen oxides and carbon monoxide of a car built in the 1960s. And the best cars on the road today emit one-tenth as much as the average vehicles.

Models tied narrowly to data on past relationships often understate the possibilities for real change in the economy. In the 1990s, Oregon’s economic model consistently under-predicted the growth of Oregon’s economy — not because the model had any technical flaws, but because the structure of Oregon’s economy changed (high tech grew far more rapidly than anyone could have imagined) and the economic relationships that held in the 1980s (which provided the data on which the model was calibrated) no longer were applicable.

The most fundamental tool of economic analysis is to think about how prices influence behavior. And in the case of pollution, economic theory has a straightforward and well-established explanation. We have pollution — including CO2 emissions — for the very simple reason that we treat the atmosphere as an unpriced dump for anything we burn. This is a classic tragedy of the commons. As long as we treat our atmosphere as an unpriced, unmanaged commons, we will get the same kind of waste and resource degradation that spoiled the old town commons in the past.

So what prompts the economy to shift gears and build more 21-speed bikes? If we get the incentives right — if we don’t send signals to consumers and producers that polluting is free — then the miracle of the market kicks in, and investors, inventors and entrepreneurs figure out new and better ways to do things.

States such as Oregon can embrace these changes, or cling to an increasingly unsustainable past. History has shown that economic change confers important first-mover advantages on places that boldly tackle new ideas (like Bill Boeing’s airplanes and Phil Knight’s running shoes). People and places that stand pat with outmoded products and economic models (think domestic makers of 3-ton V-8 powered SUVs) are the ones who will suffer most. Already, a wealth of new entrepreneurial businesses from green building, to alternative energy, to urban planning are growing in Oregon because we’re ahead of the curve, even if only a little, in thinking about a greener world.

Those who believe that we can reduce carbon dioxide emissions only by squelching or reversing the economy are the prisoners of metaphor. They fundamentally misunderstand the nature of markets and economic and technological process. The key to flourishing in a future where we must tackle global warming is not to continue to gaze wistfully into the rearview mirror, but instead to look ahead with a sense of excitement at the vast opportunities for doing things better, smarter — and cleaner.

JOE CORTRIGHT is vice president and economist with Portland consulting firm Impresa.


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