Right problem, George. But wrong solution

By Anatole Kaletsky (THE TIMES, 25/01/07):

As has become the norm under the Bush Administration, America has promised much and delivered almost nothing. President Bush’s State of the Union address was billed in advance by the White House as an historic turning point in the interconnected battles against Islamic terrorism and global warming, linked as they are through America’s addiction to imported oil.

The good news on Tuesday night was that the State of the Union speech did not seem to pave the way for any outright insanities or disasters, such as a US attack on Iran. The bad news was that, despite the expectations of significant new announcements on energy policy, the speech actually ruled out any serious progress so long as Mr Bush remains in power.

To start with the positive, this week’s state of the union offered a welcome contrast to the “Axis of Evil” speech exactly five years ago, when President Bush, intoxicated by the US military’s apparently effortless victory in Afghanistan, essentially declared a global war against any country he might deem a “rogue state”. This time the President tried to sound as chastened and conciliatory as he was arrogant and belligerent five years ago. This means that the presidency has been reduced to near-impotence and Mr Bush may no longer have the power to block the urgent changes, both in energy policy and in Middle Eastern diplomacy, that American voters, military leaders, scientists and businessmen are starting to demand.

Bush’s most important announcement was his first-ever personal acknowledgment of the “serious challenge of global climate change”. This comment, in just one throwaway phrase, incongruously squeezed behind a promise to promote more oil drilling, was not the Damascene conversion some commentators had predicted. But the fact that millions of Americans have now heard from the President’s own mouth that climate change is indeed a “serious challenge” could substantially change the terms of engagement in the political battles over carbon emissions, not only in Washington but also in the world.

From now on, it will no longer be politically acceptable for big businesses such as Exxon and General Motors to deny the reality of global warming or to subsidise researchers attempting to prove that climate change has nothing to do with carbon emissions. The result will be to shift the debate in American politics and media from whether global warming is real to how it can be prevented.

Given the American “can-do” ethic, especially among the business community, the consequence of this political shift will be an upsurge in research and investment in new energy technologies. Moreover, the pork-barrel system of political lobbying in Washington will also ensure that industries that can no longer hope to win subsidies or political protection by denying the reality of global warming will switch to the opposite tack and try to squeeze money and favours out of Congress on the pretext of enhancing energy security and combating climate change. A stampede of American businesses is now likely to follow the small elite of forward-looking companies such as General Electric, Toyota, Siemens and Du Pont, which began to see climate change some time ago as a huge business opportunity, rather than a threat.

In short, dealing with climate change will soon become a big and hugely profitable business. And climate change will become big business whether or not it is really true that we now face an existential threat to the entire global ecosystem. To see what I mean, just think of the hundreds of billions of dollars spent around the world on averting the so-called millennium bug, which turned out to be nothing more than a science-fiction fantasy, supercharged with millenarian paranoia and marketing hype.

To make this comparison is not to imply that global warming is another such illusion. There is far more evidence for global warming than there ever was for the millennium bug and the risks are infinitely greater. My point is rather to suggest that efforts against global warming could turn out to be wasteful and ineffective if governments create perverse incentives that businesses and scientists then pursue.

This is exactly what the Bush Administration now seems to be doing. All three of the President’s new energy policies ideas announced on Tuesday — to increase the use of corn-based ethanol in US petrol from 5 per cent to about 30 per cent, to raise fuel-economy standards by 10 per cent and to promote “clean coal” technology for electric power generation — will distort investment and research spending, channelling the lion’s share of available resources into some of the least promising solutions to climate change.

Extracting ethanol from corn, for example, is less than one-tenth as efficient as distilling it from sugar cane. But because of the lobbying power of agribusiness in the Midwest cornbelt, the US severely restricts the import of Brazilian sugar-ethanol and will now spend vast amounts on technology and subsidies designed to undercut the sugar-ethanol technologies with far greater potential for reducing global carbon emissions at reasonable cost.

Similarly, the 10 per cent proposed improvement in vehicle economy standards is so modest that it will divert investment from the much bigger improvements in fuel consumption that could easily be achieved if US consumers could be persuaded to drive lighter and better-designed cars. The same could be true of “clean coal” technology, which may well end up far less clean than its promoters are contending and will deflect resources from nuclear and solar research.

What policies, then, should America have adopted and how could President Bush’s successor improve on this week’s feeble start? The answer is quite clear. What America needs is not arbitrary quantitative targets — 35 billion gallons of ethanol, 10 per cent more fuel economy and so on — but a set of incentives that will allow consumers and businesses to make decentralised decisions on the behaviour changes and new technologies that will work best.

The way to create such rational incentives is through a well-regulated system of trading in carbon emission rights. A fully global system of carbon trading — even if China and other developing countries refused to participate, a system embracing just America, Japan and Europe — would be infinitely preferable to the Stalinist-style production quotas proposed this week by President Bush.

He appears to prefer a communist-style central planning to the use of market-based incentives and prices. What an ideal opportunity for Democrats to show that this supposedly pro-business President does not even understand the rudiments of market economics.