TCS Daily

How to Cripple an Economy

By Iain Murray - July 10, 2003 12:00 AM

Energy, as the late Julian Simon said, is the "master resource." It enables virtually all the activities that make modern life possible. It is the linchpin of our economy. The latest information from the Energy Information Administration (EIA), one of the few Government agencies not to have made its own aggrandizement its prime raison d'etre, makes clear that energy use is tied to economic growth and that we attempt to restrict energy use at our peril. Well-intentioned schemes to restrict emissions of carbon dioxide could cost the economy half a trillion dollars..

Last month, the EIA released its 2002 "flash estimate" of carbon dioxide emissions from energy sources. In 2001, the amount of carbon dioxide emitted from the burning of fossil fuels had declined from the levels of the previous year. In 2002, by contrast, emissions increased by 1.3 percent to 5,761 million metric tons. The EIA gave the following reasons for the growth:

This increase in emissions reflects higher economic growth, as well as both a colder winter and a hotter summer than the year before, resulting in more fossil fuel consumption for heating and electricity generation.

The American economy grew by 2.4 percent in 2002, a significant increase on the 0.3 percent growth experienced in 2001. In fact, as the American economy has grown since 1990, so have carbon dioxide emissions, with the current level representing an increase from the 4,967 million tons released then. Yet it is not the 'smoke-stacks' of industry that caused this increase. Industry-related emissions have actually decreased from 1,674 to 1,649 million metric tons. The increases have come from the residential sector as an expanding population is able to afford more heating and cooling of their homes (an increase of about 25 percent), in transportation as more goods and people travel around the country (an increase of around 20 percent) and, most importantly, an expanding commercial sector as more and more business demands more and more energy (an increase of almost 33 percent since 1990).

As people get richer, they use more energy. This does not mean that emissions increase in a linear fashion as Gross Domestic Product increases, however. The EIA also found that emissions of carbon dioxide per unit of GDP fell by 17.6 percent during this time period, which meant that greenhouse gas emissions per unit of GDP fell by 18.6 percent. Because of, not despite the thriving economy, technology has moved to make energy use more efficient, resulting in cleaner energy.


Yet because the climate change alarmists have frightened some lawmakers into assuming that drastic austerity measures are the only way to avoid a putative disaster in 100 years time, we are faced with the possibility of this thriving economy being forced to wear a hair shirt over the next decade. The EIA also released at the end of last month its analysis of the McCain-Lieberman "Climate Stewardship Act," a bill currently being considered by the Senate as part of the comprehensive energy bill. This bill, if enacted, would introduce a system of "cap and trade" credits, whereby from 2010 entities in the commercial, industrial and electric power sectors would not be allowed to produce more than a certain "capped" level of carbon dioxide emissions. However, bodies that produce less than their cap would be able to trade their allowances, thus creating a new economic market of credits and allowances from which they could profit. It is worth remembering here that Enron was pushing for just such a scheme.

The impact of such a scheme on the economy, the EIA found, would be far-reaching. As a result of price increases, the average household's energy bill would increase by $444 per year by 2025, although a new bureaucracy called the Climate Change Credit Corporation would issue rebates, assistance and other payments in a form of energy welfare to offset much of these costs.

Yet the impact on the economy as a whole can not be made up by hand-outs from government. When the system comes into operation, the economy would be severely affected resulting in job and output losses in the short-run. Because of this shock, real disposable income would drop by almost 1 percent per person by 2011 from what would have been the case and would take fifteen years to recover to levels it would have reached without McCain-Lieberman. By 2025, the average person will have lost almost $2,500 as a result of the proposal. The effect on GDP is even more startling, with the nation losing $507 billion in real terms over the next twenty-two years. By 2025, the country's GDP will be $106 billion lower in real terms than would have been the case without McCain-Lieberman.

The America that Senators McCain and Lieberman want us to live in is a poorer country in every sense of the word. People will lose thousands of dollars of income they could use to help their households, travel less, and may even lose their jobs. Environmentalists who think this is a fair price to pay for their unproven theory that global warming will endanger us might also reflect that the EIA estimates that nuclear power generation will increase by 50 percent.

Yet, if current trends persist, technological progress will have reduced emissions per unit of GDP by 55 percent from 1990 levels by 2025. It might seem wiser to continue along this path, rather than crippling our economy and putting thousands out of work.

[Eds. note -- an earlier version of this article stated: "By 2025, the country's GDP will be $106 billion lower in real terms than it is today" and that disposable income would be lower than today. Those assertions were incorrect. The current version has corrected the error and made appropriate alterations to the introduction and conclusion.]

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