A back-of-the-envelope sense of the socio-economic impact of reducing fossil fuel usage to fight global warming
I’ve been writing posts recently advocating for a Sky Trust style program to
1) cap carbon emissions from the burning of fossil fuels
2) auction the permits within that cap
3) pay out revenue from the auction to each American on a per-person basis.
One thing I’ve wondered about is, “what will the impact be on people for reducing the availability of fossil fuels by the amount necessary to aggressively fight global warming?”
The first part of the answer is to see how much reduction of fossil fuels will be necessary. The standard goal being targeted in currently proposed legislation is to cut carbon emissions by 80% by the year 2050. That gives us roughly 40 years (since any program will only begin in a couple years at best), and, depending on the precise details of the program will require annual reductions–for the first bunch of years, at least–of between 2% and 4%.
So let’s go with the 4% per-year reduction scenario, and let’s assume that reducing carbon emissions by 4% is effectively the same as reducing use of fossil fuels by 4%. What’s that mean in terms of the impact on the economy and everybody’s lives?
Well, a first (and rough) estimation is to compare what happened in past economic recessions when fossil fuel consumption fell. True, in those cases, the cause and effect weren’t quite lined up the same–much of the reduction in fuel use during a recession is a reaction to the recession, whereas in a policy of fighting global warming it would be a forced restriction on the availability of the fuels, with some level of economic fallout as a result.
On the other hand, some of the cases of reduced fossil fuel use in the past were during the oil embargo of the mid 1970s and following the Iranian Revolution in 1979. While there was a lot of vicious cycle going on in those years (spiked oil prices –> economic recession –> reduced demand for energy and fuel) (or, spiked oil prices –> inflation –> Federal Reserve Bank cranks up interest rates to fight inflation –> severe recession –> reduced demand for energy and fuel), it seems a decent rough initial approximation of what will happen under a policy to fight global warming.
The Department of Energy’s Annual Energy Review, Table 1.3 “Energy Consumption by Primary Energy Source, 1949-2006” shows when fossil fuel use has declined in past years. Years with declines are:
2006 -1.5% (preliminary data)
So that’s not terribly good news for the bulk of people who will have to adapt to reduced availability of fossil fuels under a cap-and-trade program. Things in 1975 and the early 1980s weren’t that pleasant, so I’m led to believe (I was too young to know what was going on very well myself–I remember seeing gas lines, but didn’t really grasp the situation, and had no concept of interest rate hikes or any of that sort of thing). And those were years with drops in fossil fuel use of around 4%, toward the upper end of how much of a drop might be mandated under a cap-and-trade program, at least for the first couple of decades.
But the news isn’t as bad as it might first seem. First of all, a good cap-and-trade policy will include, as noted at the top of this post, an auction of all emissions permits and the distribution of all auction revenues to all Americans on an equal, per-person basis. That will pad the economic hardship quite a bit. Imagine if, during the 1973 oil embargo or following the Iranian Revolution, all the excess profits received by the oil companies had not gone to corporate executives or stock holders or Saddam Hussein or the King of Saudi Arabia or any of the others with their fingers in the oil pot, but instead all that money had been divvied out back to the consumers who were paying high prices at the pump. People still would have had to adjust, but it would have been a heck of a lot easier to do so. That’s part of the beauty of a cap-auction-rebate version of a cap-and-trade program.
We’re still not to the end of the story. (And never will be, technically speaking, but that doesn’t mean this post will go on forever.) Another difference between those historical cases of reduced fossil fuel use and our hypothetical reduction under global warming policy is the much-vaunted reduction in the energy intensity of the economy today versus those past years.
What that means is that, today, less energy is used in the creation of $1 worth of economic activity than was needed to create the same economic activity 10, 20, or 30 years ago. On a per-dollar basis, the economy is much more energy efficient than it was in the past. For example, in the 20 years between 1985 and 2004, the energy intensity of the US economy fell by 10%. As a result, a reduction in the availability of fossil fuels should not have as severe an impact, relatively speaking, as the same size reduction that may have happened in the early 1980s. The economy, because of improvements in energy efficiency, should be able to absorb the reduction in energy availability more gently. (That’s one of the reasons given for the fact that the large increases in the cost of oil these past couple of years have not led to the kind of recession that similar increases caused in the 1970s.)
So what’s the take-home message? This, I guess: a cap-and-trade program to reduce global warming will probably have only a relatively mild negative effect on the economic lives of most Americans (using traditional economic measures of well-being, which definitely leave something to be desired), or maybe even just a neutral effect, or maybe even a mildly positive effect (due to the distribution of money from the permit auction). That’s pretty good news in a world of global warming.