http://grist.org/article/the-price-is-wrong-by-gar-w-lipow/
[A short excerpt from the following was previously published on the "Triple Crisis" blog of Dollars & Sense magazine]
For United States climate activists to succeed, they must demand serious government spending on energy efficiency and renewables – spending comparable to the current war budget. Calling for hundreds of billions in annual green public investment has potential for the popular appeal needed to build a powerful grassroots climate movement. That investment would be the best policy as well. Massive clean energy spending would not only provide jobs and economic growth on a grand scale. It is the most effective way to reduce greenhouse gas pollution.
It is widely, though not universally, acknowledged that solving the climate crisis will require public investment and subsidies, efficiency regulations and clean energy requirements, plus a price on greenhouse gas emissions. (The idea behind a carbon price: polluters pay per unit of greenhouse gas pollution released.) But in practice policy advocates tend to fetishize the carbon price and drop other requirements. For example, James Hansen, perhaps the world’s leading climate scientists says “..If we would put this price on carbon it would favor renewables, and it would favor energy efficiency, and it would favor nuclear power—it would favor anything that is carbon-free… ”[i]<http://grist.org/Users/Gar/Documents/docs/CarbonPricedolAndSense.doc#_edn1> Charles Komanoff and James Handley of the Carbon Tax center describe a carbon tax as the “*sine qua non* of effective climate policy”.[ii]<http://grist.org/Users/Gar/Documents/docs/CarbonPricedolAndSense.doc#_edn2> Mainstream environmentalism tends to favor cap-and-trade over carbon fees, which indirectly results in a price on carbon. Between carbon tax and cap-and-trade advocates, most climate change opponents prioritize carbon pricing. Few join Komanoff in referring to such pricing as the “sine qua non” of carbon policy. In policy discussions, however, most environmental economists start with cap-and-trade or a carbon fee, and many never discuss anything else.
What is wrong with this? Since we can’t phase out greenhouse gas pollution instantly, it seems fair to require polluters to pay something in return for the damage they cause until that pollution ends. Further, such payments provide some incentive to reduce the amount of greenhouse gas pollution emitted.
The problem arises when pollution prices are prioritized over other solutions. The climate crisis cannot be solved without huge infrastructure investments: wind turbines, solar panels, transmission lines, smart grid upgrades, trains, electric cars and efficiency improvements. Historically new infrastructure has never been built solely or largely as profit seeking, risk taking behavior in response to what economists call price signals. Large investors mostly seek to maximize profits while minimizing risk by tapping flows of public money, either by doing business with the government, or by use of government created goods and services at below cost.
Public investment, government spending of various types has not only contributed, but been key to infrastructure transformations. Sometimes that public investment has taken the form of public ownership or subsidy, sometimes grant of land or right of way. In one form or another, public investment is always crucial.
Consider United States history. The Post Office was considered so essential it is mentioned in the Constitution. The Erie Canal, an early major infrastructure project in the United States, was financed primarily by New York State’s ability to borrow. Telegraph companies paid nothing for rights of way whose value far exceeded money invested to construct them, and direct government funds besides. The great intercontinental railroads were granted free rights of way, plus land on either side of the tracks for real estate development. Similarly, streetcars in cities flourished based on free or discounted rights of way, and other subsidies. Water and sewer infrastructure is mostly public in the United States, and always publicly subsided. Fossil fuel pipelines are granted public rights of way, and often delegated power of eminent domain to secure easements from unwilling private landowners. Electric lines, phone lines, broadband lines require similar arrangements. Public wireless spectrum is sold to private interests at far below market value. Highways, roads, airports and water ports are financed publicly, with very rare exceptions.
Maybe a massive transformation in energy producing and consuming infrastructure can reverse this. For the first time in history a change of this magnitude might be largely privately financed, with public involvement mainly bei`ng in the form of ‘getting prices right’. Maybe direct public investment and regulation other than setting a carbon price can be supplements rather than the main means. But contemporary as well as historical evidence suggests otherwise.
Corporate decision making is far less responsive to energy costs than many economists assume. James K. Boyce’s article “Pursuing Profits – or Power” in the July/August 2013 issue of Dollars & Sense pointed out that when it comes to political lobbying, the rich will seek increased power, even at the expense of a business environment that lowers profit. That same choice is reflected in internal decision making at the individual firm level. When deciding where to invest money, businesses generally demand extremely high expected rates of return for energy savings, and other flow operating costs (such as water and raw materials) compared to returns on general investment [iii]<http://grist.org/Users/Gar/Documents/docs/CarbonPricedolAndSense.doc#_edn3>. Most of the literature does not explicitly compare rates of return on flow savings to rates demanded for general investment. Instead extensive research shows that various rules of thumbs and shortcuts are used to evaluate this kind of project, compared to the more careful methods used to evaluate general investment. That results in demanding much higher rates of return from capital invested to reduce flow costs (energy, water, raw materials, etc.) than for savings in labor. A tiny percent of that difference is explained by factors such as transaction costs. But the primary reason businesses give is that energy (and other flow) savings are “not their core business.” In practice, “core business” usually equals increasing labor productivity. Labor savings increase leverage over workers in a way that savings in energy and other flow costs do not increase leverage over suppliers. Energy, unlike workers, does not go on strike.
Response to price increases is similarly sluggish in owner-occupied residential buildings That is because capital is much more expensive for individuals than firms, and also because people feel the need to maintain savings for emergencies – including job loss. So individuals require much greater returns before upgrading insulation in buildings than utilities require before investing in new generation. Renters have even less incentive to invest in insulation, which becomes a gift to their landlord whose value they may not recover before moving out. Similar response rates can be found in commercial buildings, and in the transportation sector, excluding freight and air travel.
Another reason price should not be the primary driver of change is that we simply cannot measure local emissions with a reasonable degree of accuracy or precision. Gases released into the atmosphere spread quickly, so taking samples in a few spots gives us a very good idea of worldwide greenhouse gas concentrations. But local emissions are very difficult to measure, and both precision and accuracy is very rough at that level. Note that levying a carbon price upstream, say when coal is mined, is NOT a workaground for this. To understand why, consider fossil fuels used to generate electricity. [read the rest on Grist] http://grist.org/article/the-price-is-wrong-by-gar-w-lipow/
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