The Market and Mother Nature

Helga y UzielWhenever I hear the word “cliff,” I am reminded of something that the President Obama’s science adviser, John Holdren, used to say about how we need to respond to the climate change because no one can predict when it might take a disruptive, nonlinear turn. “We are driving toward a cliff in a fog,” said Holdren about climate, and that’s always a good time “to start tapping on the brakes.” Indeed, when you think about how much financial debt we’ve built up in the market and how much carbon debt we’ve built up in the atmosphere, the wisest thing we could do as a country today is to start tapping on brakes by both emitting less carbon to bend the emissions curve down and racking up less debt to bend our debt-to-G.D.P. curve down. Unfortunately, we are still doing neither. (source: Thomas L. Friedman – NYTimes – 09/01/2013)

Indeed, we are actually taunting the two most powerful and merciless forces on the planet, market and Mother Nature, at the same time. We’re essentially saying to both of them: “Hey, what’ve you got, baby? No interest rate rises? A little bitty temperature increase? That’s all you’ve got?” I just hope we get our act together before the market and Mother Nature each show us what they’ve got. Let’s look at the huge carbon and financial deficits we’re amassing. For thousands of years up to the dawn of the industrial age 200 years ago, Earth’s atmosphere contained 280 parts per million of the heat-trapping greenhouse gas carbon dioxide. Today, that number is nearly 400 p.p.m., with 450 p.p.m. routinely cited as the tipping point where we create conditions for out-of-control acceleration. Melting the permafrost in Alaska, Canada, Siberia, for example, would release massive amounts of carbon that would further increase global warming. Permafrost is packed with CO2 and frozen methane, which is 25 times more potent a greenhouse gas than CO2. “If the tundra continues melting,” says Hal Harvey, the chief executive of Energy Innovation, “we could basically release the equivalent of all the carbon that all humanity has emitted from start of history to now.” That would really send temperatures soaring, ice melting and sea levels rising.

We’re on a similar trajectory with our debt. Mounting deficits have driven America’s debt-to-G.D.P. ratio from 36.2% in 2007 to 72.8% today. In their widely hailed book on credit crises, “This Time Is Different,” the economists Carmen Reinhart and Kenneth Rogoff argue countries that allow their debt-to-G.D.P. ratios to exceed 90% experience slower growth and greater instability, much like hitting a climate tipping point. Indeed, they note, those who would point to low interest rates today as some kind of “all-clear” for more debt “should remember market interest rates can change like the weather”. There is another striking parallel. At some point, when we allow so much carbon to build up in the atmosphere, our mightiest efforts to cut emissions through energy efficiency, conservation, new technologies will only enable us to stay in place. They won’t be able bend the curve downward anymore. And 450 p.p.m. is not a place we want to get stuck. At some point, debt will get so large that big tax increases and spending cuts will simply go to pay interest. We also won’t be able to bend that curve anymore, and spending on infrastructure, education and the poor will vanish. I am struck by how many liberals insist on reducing the carbon emissions immediately, but, on the deficit, say there is no urgency because no interest rates rises are in sight. I am struck by how many conservatives insist we must reduce the deficit immediately, but, on climate, say there is no urgency because, so far, temperature rise has been slight. (Although 2012 was the hottest year on record in the continental U.S.) One reason interest rates are so low is that they are being suppressed by the Federal Reserve’s quantitative easing. That won’t last. As for the climate, well, “Mother Nature doesn’t do quantitative easing,” said Harvey. Beware of nonlinear moves in both.

We can’t go off coal overnight, and we can’t go into recession by cutting spending overnight, we need to start tapping on the brakes in both realms by agreeing on spending cuts, tax increases and new investments that would be phased in as the economy improves, as well as higher efficiency standards for power plants, buildings, vehicles and appliances that would be phased in, too. A carbon tax would reinforce and make both strategies easier. According to a September 2012 study by Congressional Research Service, a small carbon tax of $20 per ton, escalating by 5.6% annually, could cut projected 10-year deficit by roughly 50% (from $2.3 trillion down to $1.1 trillion). What would you rather do to help solve our fiscal problem: Give up your home mortgage deduction and wait 2 more years for Social Security and Medicare, or pay a little extra for gasoline and electricity? These will be our choices. I’d rather pay the little carbon tax, especially since it would clean up the air for our kids, drive innovation and make us less dependent on most unstable region in the world: Middle East. How could a carbon tax not be on table today? 


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Consultor Internacional

4 Responses to The Market and Mother Nature

  1. (NYT GOLDEN PICK) Professor Uziel Nogueira says: During my PhD years at MSU in the late 70s — height of the environment movement — one professor style agent provocateur used to say that environmental preservation only became a priority when the US developed into a rich and prosperous society. Today, the US is the largest debtor nation in the world and unemployment is all times high. Even though the economy continuous to produce tremendous amount of wealth, income is concentrated in the hands of the 1% of the population. Millions of Americans survive on food stamp.

    I am afraid that environmental priorities related to climate change are no longer a concern for the 99% of the population. Talking about taxes on fuel consumption in the US is the equivalent of talking about gun control. Mr. Friedman’s column is politically correct for the 1% but written at the wrong economic time.

  2. MikeJ: That’s where true leadership by our government and business leaders should be enabled. Alas, we see very little of it these days. If the institution of a carbon tax disproportionally effects the 99%, there will be (and should be) push back. But a carbon tax may be one of the best tools in slowing carbon emissions, since it creates a market signal that creates incentives for low-carbon (or zero carbon) alternatives. There may not be a “right” economic time to begin transitioning to carbon-free energy, but the alternative will be certain catastrophe for our planet and inhabitants.

  3. Since the beginning of the year, California, the most populous of the United States, has a price on carbon emissions. The cap-and-trade system known as AB 23 ultimately puts a dollar price on industry carbon emissions (according to our colleague Felicity Barringer, the precise price of $10.09 per metric ton of emissions in the first free-market bidding in November). “By putting a price on carbon, we can break our unhealthy dependence on fossil fuels,” said Mary D. Nichols, the chairwoman of the California Air Resources Board, according to Felicity’s report. With the new cap-and-trade system, California joins Ireland, Australia, Norway and many other countries in taxing what most agree is one of the root causes of global warming. Much like tobacco taxes introduced in the latter half of the last century — and now commonplace in most developed countries — taxes on carbon emissions act both as a deterrent and as a source of revenue with which to finance clean energy solutions, proponents say. The economist Robert H. Frank, in an opinion piece last year, made the basic case that high carbon taxes on gasoline would lead to more fuel-efficient cars. Dr. Frank, of Cornell University, suggested that a carbon tax of $300 for a ton of carbon emissions might be enough to structurally change the kind of cars Americans drive. He wrote: “The price of gasoline, for example, would slowly rise by somewhat less than $3 a gallon. Motorists in many countries already pay that much more than Americans do, and they seem to have adapted by driving substantially more efficient vehicles.” An excellent article on Ireland’s carbon tax boon points to the other part of the equation — despite three years of recession, the Irish government is managing to balance its books, in part due to carbon taxes on cars, gas and even garbage. Elisabeth Rosenthal reported late last year that Ireland’s deficit has decreased from 32.4 percent in of gross domestic product in 2010 to 8.3 percent of GDP in 2012 in part due to a new taxes on carbon — despite the economic downturn. “This is a way to secure competitiveness in the future,” Connie Hedegaard, the European Union’s commissioner for climate action, said in an interview with Elisabeth. Opponents of carbon taxes are not sure about that claim to competitiveness. Depending on where the carbon tax is applied, it can make transport, utilities and production costs go up. Last month, the Australian Retailers Association released results of a survey in which they found that 80 percent of Australian retailers say their business has been negatively affected by the new carbon taxes in place in that country since July of 2012. Russell Zimmerman, the head of the retail organization wrote in a statement: “The introduction of carbon pricing was a massive legislative change for small business and one which has had a significant impact. In a climate of already suppressed retail spending, retailers are taking the hit of the carbon tax as consumers bypass the stores to pay household bills. Meanwhile, the cost of doing business has gone up for retailers due to higher utility bills and costs accumulated throughout the supply chain, which eventually fall onto retailers’ bottom lines…”

  4. Professor Uziel Nogueira says: Tax on carbon emission — called a negative externality in economics — became a topic of academic and political interest during the second half of the 70s. The debate gained momentum and urgency in the US-Europe after the oil price shocks of 1973-1979. After 1973, taxes on fuel prices were substantially raised in Western Europe. Gasoline prices in the European Union are the most expensive in the world today. The upside of this price policy has been substantial gains in fuel efficiency, lower carbon emission and development of the largest and best public transportation system among the G-7. In the US, taxes on fuel prices never gained political traction in order to curb carbon emission and develop a modern public transportation system. From a political standpoint, to talk about fuel taxes is the equivalent of talking about gun control. It is a poison pill for any US politician seeking office or reelection. The poor state and decline of the US economy are another adverse factor playing against fuel taxes. If selling carbon taxes was politically difficult during years of prosperity, it is mission impossible during years of economic austerity and high unemployment. Environment protection is no longer affordable by the 99% of Americans.

    China is becoming the top leader of alternative energy use in transportation and curbing vehicle produced carbon emission. In addition, Beijing is setting up the largest and most advanced high speed railroad system in the world.


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