Saturday, December 29, 2007

The economic cost of green policies.

We have heard a significant amount of noise regarding the "cost" of implementing the Kyoto accord in Canada.

While I agree that meeting all of the 2012 Canadian Kyoto objectives would certainly come at a significant cost, one can ask whether there is anything, at all, which is economically worth doing?

Actually, wouldn't it be extremely surprising that every single measure which are considered to reduce our CO2 footprint would also happen to have a detrimental economic cost? (i.e. costing more than the benefits it produces). Wouldn't it be worth looking into costing those measures?

As it happens, Vattenfal, a Swedish power and heat generation company, has done just such research and it seems that there are quite a few opportunities that are actually economically beneficial beyond their environmental benefits. That is to say; even if we derived no environmental benefits from those measures, they would still be worth implementing as they would be economically benefitial.

Take a look at the chart below. (A negative cost of abatement means that the measure would not only cut emissions, but would also save people and companies money)


Looking at this, it seems to me that a lot of the North American's CO2 reduction opposition discourse of today is one of ideological posturing with a non-interventionistic stance rather than a rational, economics based one. For the result-based mind, the position is hard to understand. I would certainly advise those governments to not block the measures because of abstract ideological opposition to government intervention but to rather let them through on the basis that they make economical sense. Looks like a win-win situation to me, doesn't it?

Actually, The Economist (a result-based magazine, if I ever saw one), had this to say about the Vattenfal findings:

"Economists generally prefer to avoid rules that specify what companies can produce and how, because they require governments, rather than markets, to allocate resources, and markets tend to do a better job. But if, as in this case, a public as well as a private good is involved, and the market does not seem to be doing its job properly, there is an argument for government giving it a nudge." (The Economist, June 2nd 2007, page 9)

Although I could not find a paper that would have researched the abatement costs specific to Canada, a joint Conference Board/McKinsey report details the specifics for the U.S. :

What they found is surprising: "40% of the reductions identified could generate net savings to the economy". They also add that "Savings can substantially offset the remaining total capital, operating , and maintenance costs". While this is also great news, I am not putting the emphasis on the second part as some could argue that the saved money could be invested somewhere else in the economy until we understand the "true impacts" of global warming (I will leave it up to the reader to decide how much more research has to be done before it is considered "sufficient").

Based on the Vattenfall and McKinsey report, it would seem to me that for the short term, there are a few regulatory steps that must be taken by our governments. Provided that most of the economically positive measures highlighted in those reports center on technologies that have already been codified and standardized (and are available today) such as more efficient lighting, electronics, vehicles and housing, it is now time to enforce those standards.

What could it look like in concrete terms? That would most likely mean banning non EnergyStar electronic devices and appliances, adopting stricter national/provincial building codes, imposing higher fuel efficiency standards for vehicles.

However, more than political will, I believe these policies would require ideologues to take a step back and think again about what exactly they are opposing...