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Economix: Eric Fruits cuts carbon the hard way

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Tuesday, April 01, 2008

Mankind’s history is a story of seeking greater economic growth. As long as they have been around, economists have stood on the sidelines coaching everyone else how to achieve greater growth. So, why am I giving advice on how to slow Oregon’s growth?

Oregonians are passing through an era where fears for our children’s — and our children’s children’s — future welfare exceed our own desire for present prosperity. Fears of global warming (also know as climate change if it’s snowing outside) have spurred Oregon’s government and business leaders to do whatever possible to reduce the state’s carbon emissions.

{safe_alt_text} BY ERIC FRUITS

Few things are known for sure in the study of global warming/climate change, but one thing that is fairly well settled is the relationship between increases in carbon emissions and economic growth: Greater growth is associated with higher emissions. The relationship is virtually axiomatic: Economic growth is associated with energy use, and energy use causes carbon emissions.

The relationship between economic growth and carbon emissions makes policy analysis straightforward. If Oregon slows economic growth, carbon emissions will be reduced. Conversely, reducing carbon emissions will slow or reverse economic growth. Since Oregon seeks to be at the forefront of reducing carbon emissions, I propose five ways to accomplish this by slowing the state’s economic growth.

Charge a carbon tax: A carbon tax typically imposes a fee on fuel suppliers and utilities based on the amount of carbon dioxide estimated to be emitted when the carbon-based fuel is consumed. Gasoline, diesel fuel, home heating oil, natural gas and electricity from coal or gas-fueled plants would all see higher prices from a carbon tax. But because the carbon tax would increase the costs of production and transportation, every good purchased by every household and business in Oregon would be more expensive. These higher costs would eventually result in higher labor costs, further cutting into Oregon’s competitiveness and slowing its growth relative to the rest of the country.

Impose green-energy mandates: These mandates are based more on numerology than on economic or technical feasibility. Oregon’s 25-25 plan requires the state’s largest utilities to meet 25% of their electric load with new renewable energy sources by 2025. Curiously, the mandate does not count existing use of renewable hydroelectric power, which accounts for more than half of the state’s current electricity generation. As with a carbon tax, the 25-25 requirement would increase the costs of almost every good or service purchased by every household and business in Oregon. The higher costs would help to slow economic growth and, in turn, further reduce carbon emissions.

Defer road maintenance: Who would have thought that we could slow global warming by simply doing nothing? A sizable portion of economic growth can be attributed to transportation improvements. Better transportation effectively shrinks the world and improves the gains from trade with other parts of the country and the world. Deferring road maintenance allows the state’s highway system to deteriorate, thereby increasing travel time and transportation costs. The increased costs of transportation reduce the amount of traffic in Oregon, thereby reducing carbon emissions.

Get rid of industrial land: The lack of usable industrial land is one of several reasons manufacturers choose to build or expand outside of Oregon. The condominium craze in the first half of the decade replaced some of the state’s industrial land with residential and mixed-use developments. If communities convert increasing amounts of land currently used for industrial purposes to non-industrial uses, the state’s carbon emissions would almost surely shrink.

Stifle investment: Governments around the world think that they can “pick winners,” or identify burgeoning industries that would provide problem-free growth to their communities. Picking winners is usually achieved by directing tax credits and other incentives to the target industry at the expense of other businesses that may want to move or expand in the community. Taxes paid by the unfavored existing businesses are transferred to the favored businesses. In Oregon, Business Energy Tax Credits favor facilities that use or produce renewable energy resources, manufacturers of renewable energy resource equipment, alternative fuels and homebuilders that build “high-performance homes.” Such transfers introduce friction into the investment stream and ultimately stifle investment. Lower investment ultimately translates into lower growth and reduced carbon emissions.

Economic growth brings prosperity, and prosperity gives us the wherewithal to adapt to almost any change the world throws at us. Perhaps the best way to deal with global warming or climate change is to encourage growth and prosperity so that we can adapt to it. It seems so much easier — and more beneficial — than slowing our progress in the hope of halting change.

Eric Fruits is a senior economist at ECONorthwest. He also is an adjunct professor at Portland State University.

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