Thursday, November 06th, 2008 | Author:

Why a verdant New Deal would be a bad deal

Two pressing problems face the world: economic meltdown and global warming. Conveniently, a solution presents itself that apparently solves both: governments should invest heavily in green technology, thus boosting demand while transforming the energy business.

This notion is gaining credence around the world. Last month the United Nations called for a “Global Green New Deal”. But it is in America that the idea is really taking off. The United States Conference of Mayors reckons that green investment should provide 2.5m jobs. The Centre for American Progress, a leftish think-tank, thinks $100 billion worth of spending in the area would spawn 2m jobs. The new president tops both. Barack Obama proposes spending $150 billion over ten years, thus helping, he says, to create 5m jobs.

There is a historical parallel to this synergy between two worthy aims. Just as military spending at the end of the 1930s defeated both fascism and the Depression, so spending on fighting climate change should both wean mankind off fossil fuels and avert what might otherwise turn into the most serious downturn since the 1930s. Isn’t that neat?

No. Mr Obama’s commitment to solving climate change is devoutly to be welcomed. There is also a case for giving the economy a boost through government spending. But combining the two by subsidising renewable energy is, like many easy answers, the wrong solution.

Governments can discourage companies and people from producing CO2 by making polluters pay or by reducing the costs of clean energy. Europe does both, through a cap-and-trade system (which caps CO2 emissions and requires companies to buy permits to pollute) and through subsidies. Mr Obama is, quite rightly, planning to introduce a cap-and-trade system, but he is also promising massive subsidies.

Making polluters pay is unpopular with companies. Politicians don’t much like it either, because it means a fight with business. But it’s the efficient way to discourage pollution, because it shifts costs onto those who should bear them, and allows the market to pick the best way of cutting emissions.

Sunless solar and the biofuels bust

Subsidies are more popular but both theory and practice argue against them. Subsidising clean energy requires politicians to decide on the best way of delivering it, and their judgement is likely to be worse than the market’s. America’s huge ethanol subsidies, for instance, have led to overinvestment in the businesses, which is now experiencing a sharp bust, and have helped drive up the price of food, with painful consequences for the world’s poor. Germany’s generous solar subsidies covered the roofs of one of the world’s most sunless countries with solar cells, thus pushing up the price of silicon and reducing the cost-effectiveness of solar power in countries where it actually makes sense. Both subsidies promoted the wrong technologies; both wasted taxpayers’ money.

The easy notion that there is a single solution to the world’s economic and climatic problems is, thus, a dangerous one. Yet there is a synergy, though a subtler one, between the two issues. In the midst of a financial crisis seen as emanating from Wall Street, a demonstration of leadership would help burnish “Brand America”. Combating climate change, which demands technological and financial resources of the sort that only America has, offers the right sort of challenge.

The world needs America to lead the fight against climate change. But if Mr Obama goes about it the easy way, rather than the right way, he will discredit the cause he espouses, and thus damage the planet instead of saving it.

[Source: The Economist]

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