On "How Economists Have Misjudged Global Warming". (from Readers)
My esteemed friend Robert Ayres's lucid dissection of economic climate models ("How Economists Have Misjudged Global Warming," September/October 2001) is such a valuable contribution that I hesitate to quibble; yet our residual point of difference matters.
Economics interprets and mediates customer choice through price signals. From recognizing that price is important, it is but a short step to supposing that nothing can change without it. As Ayres puts it, "...the only sure way to encourage people to use less energy rather than more is to raise the price. It can make sense to subsidize one form of energy while taxing another. But overall, the price paid by consumers of fossil fuels will have to go up if the output of [CO.sub.2] is to go down. In this sense, there is no free lunch."
That conclusion follows from the economic theory of price elasticities, a measure of how people responded to price in the past, under conditions that no longer exist, and that energy policy alms to change....But it is also a cramped vision of the potential for achieving change by other means,
If price is the "only sure" way to cut energy use, why did the United States cut its energy intensity at the near-record pace of 3.2 percent per year during 1996-99, despite record-low and falling energy prices? It was not just because of structural change (composition of output), but also because factors other than energy price--such as environmental concerns and valuable non-energy side-benefits--were getting people's attention. Price is not some magic essence that mechanistically drives all behavior; it is simply one more way of getting people's attention.
Why, during 1990-96, did Seattle customers cut their peak electric loads 12 times as fast as Chicagoans, and their annual electricity use 3,640 times as fast, even though they paid only half as much per kWh? Because Seattle City Light encouraged saving electricity, while Commonwealth Edison discouraged it. Correct prices are useful and important, but ability to respond to price is even more important. Hence the key role of "barrier-busting"--turning into a business opportunity each of the 60 to 80 obstacles to using energy in a way that saves money (
Why did DuPont find that its European chemical plants, despite long paying twice U.S. energy prices, were no more efficient than their U.S. counterparts? Because they were all designed by the same people, by the same methods, using the same equipment, and there's little opportunity for behavioral change in a chemical plant. Yet optimizing whole systems for multiple benefits, not isolated components for single benefits, can typically increase energy and resource productivity by 3 to 10 fold while reducing construction cost and improving performance. My book, Natural Capitalism, offers many examples. Even in retrofits, a huge empirical literature shows that similarly large savings typically cost less than the energy they save.
That's why such savings are not just a free lunch but a lunch you're paid to eat. And it's why climate protection, even very far beyond Kyoto targets, is not costly but profitable. This was true 19 years ago when I co-authored Least-Cost Energy: Solving the [CO.sub.2] Problem, and 10 years ago when I co-authored "Least-Cost Climate Stabilization." It's still true today, only more so, because design and technology are far better.
This isn't just my eccentric notion. DuPont wouldn't be planning to raise its energy productivity by at least 6 percent a year through this decade, and STMicroelectronics (the fourth-largest chipmaker) to emit zero net carbon by 2010, if it would cost them more. Actually, both firms see their ambitious targets as keys to competitive advantage. They're right. Superefficient chemical and chip plants work better and build cheaper and faster, so early adopters win.
Economists, even excellent ones like Bob, are naturally skeptical that free lunches are big, let alone big enough to stabilize climate, because this would mean that market failures are more important than market function. …