Aggressive Greenhouse Gas Policies: How They Could Spur Economic Growth
Greer, Mark R., Journal of Economic Issues
Recent years have witnessed increasing concern about the environmental dangers posed by global warming. The buildup of atmospheric carbon dioxide and other greenhouse gases raises the possibility of climate change, including a change in the general circulation of the atmosphere and shifts in precipitation patterns. The environmental consequences of greenhouse gases are as yet uncertain, but they are a cause for concern.(1) Alarm about economic stagnation and unemployment has also gripped the public, as the major Western industrialized economies appear to have entered a period of stagnant growth. Many would undoubtedly agree that these two dangers, one environmental and the other economic, rank among the most important issues we face today.
It is important to understand what effect solutions to the environmental problem may have on the economic problem. Analysis of the economic impact of reducing greenhouse gas emissions has been dominated by neoclassical economics, which claims that any efforts to reduce them will come at the cost of foregone economic output [e.g., Manne and Richels 1990; Nordhaus 1991]. For example, Manne and Richels [1990, 68] state that it would cost the United States $3.6 trillion (discounted present value) to maintain its carbon dioxide emissions at 90 percent of their 1990 level through the year 2100. Claims such as these, coming as they do from professional economists, tend to undermine the political will to reduce greenhouse gas emissions, especially at a time when concerns about employment are foremost on people's minds.
The purpose of this essay is neither to criticize neoclassical analyses of reducing greenhouse gas emissions nor to question the assumptions upon which these analyses are based.(2) Rather, this essay applies an alternative economic framework, that of Keynesian theory, to this public policy issue. Focusing on investment, this essay will demonstrate that, according to Keynesian theory, greenhouse gases can be reduced without adversely impacting economic growth. Once this point has been argued, the essay will examine a possible supply-side objection to the phasing out of fossil fuels, after which a counterargument to this objection will be made.
The essay will then demonstrate that Keynesian theory suffers a shortcoming in that it disregards how product and process innovation are associated with investment. Recognizing that product and process innovation are an integral aspect of economic growth but retaining the Keynesian insight into the relationship between investment and aggregate demand allows one to discern that reducing greenhouse gas emissions would likely stimulate economic growth and employment. The linchpin of this argument, to be presented at the end of the assay, is that reducing greenhouse gas emissions would stimulate investment in alternative energy technologies as firms strive to adopt these new technologies. This increase in investment would in turn stimulate aggregate demand and boost economic growth. Hopefully, by introducing alternatives to the neoclassical approach, this essay will help to engender the "paradigmatic pluralism" that Soderbaum [1990, 482, 486-7] calls for.
In order to keep a manageable focus, this essay examines just one facet of an overall strategy of reducing greenhouse gases: reducing the use of fossil fuels through gradually phased in excise taxes on their production. To be sure, other greenhouse gases, such as methane, pose potential environmental problems. However, since the burning of fossil fuels is the most significant potential cause of global warming [Ogawa 1991, 24], reducing society's use of fossil fuels would be the central component of any policy to alleviate the risk of global warming.
A Keynesian Analysis of the Effect of Phasing Out Fossil Fuels on Economic Growth
The point of departure for the forthcoming analysis is that firms' investment decisions are driven by their expectations of the future, especially their expectations of future demand for their products. …