Can We Afford Costlier Energy?

Alternative energy sources can help reduce our dependence on foreign oil and reduce our negative impact on the environment. But for now, they cost more than traditional fossil fuels. To level the economic playing field and help develop the alternative energy sector, the government provides subsides and other support.

Such subsidies are helpful (see my last post on this topic) but they can also end up propping up dead-end approaches that ought to be superseded by next-generation technologies.

Another way of fostering the development of alternative, low-carbon energy sources is simply by raising the cost of less desirable energy sources–by taxing them or regulating them through measures such as carbon caps. Raising energy prices would make alternative energy sources relatively more attractive without having to make predictions about which specific technologies or approaches are the right ones for the future. It would also motivate increased conservation efforts.

But can we afford to raise the cost of energy? Opponents of schemes to reduce greenhouse emissions or to develop alternative fuels often cite economic justifications. They say increased energy costs will depress economic growth and raise costs for businesses and consumers.

Oklahoma Senator James M. Inhofe, a notorious denier of global warming (he called it the “greatest hoax ever perpetrated on the American people”) has voiced such concerns. He was recently quoted in the New York Times as saying ““I believe the current financial difficulties will only reinforce the public’s concerns about any climate bill that attempts to increase the costs of energy and jeopardizes jobs in the near term.”

A recent article in the Wall Street Journal cites several officials, including some more sympathetic to efforts to address climate change, voicing the same concerns. But that same article references an EPA study that found that the leading senate proposal to cut emissions would have very modest economic costs, holding GDP growth between 2010 and 2030 to 80% versus a projected 81% increase in the absence of the emissions reductions measures.

The Pew Center on Global Climate Change has released studies showing that the expected economic impact of an emissions program that would cap and freeze greenhouse gas emissions at 2000 levels would have a tiny economic input, but a substantial environmental one.

The economic crisis that is unfolding around us now has slashed energy costs, as the Wall Street Journal reports. Crude oil prices have been cut in half in the last 3 months. If low energy prices are critical to economic growth, the market has delivered them to us just when we need them, thanks traders’ expectations that energy demand will fall in a coming recession.

Can the economy recover and grow with higher energy prices, though? Maybe this is an opportunity to put a floor under energy costs with taxes and regulations that direct the market to develop clean energy alternatives. This the essential question Roger Lowenstein asks in an October 19, 2008 article in the New York Times Magazine.

The EPA and Pew studies I cited suggest that the country can enjoy healthy economic growth even in the presence of measures that raise energy costs and reduce greenhouse emissions. I haven’t found any historical analysis showing that higher energy prices has crimped economic growth (other than at times of the skyrocketing energy costs that resulted from the middle east oil shocks of the 1970s).

So I believe claims that increasing energy costs will hurt our economy should be viewed with skepticism and measured against the long-term benefits of ushering in a new era of clean and geopolitically safe energy sources.

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