August 25, 2010

It's not Environment vs. Economy: Green is the Path to Prosperity

The day after the climate bill failed in the U.S. Senate, the New York Times' conservative columnist Ross Douthat gave his take on "The Right and Climate" in a piece that on the surface sounded reasonable. Maybe it was best that the bill didn't pass, he says. While he displays some bravery in calling out the climate change deniers, who remain almost entirely on the right, for "making a spectacle of their ignorance," he nevertheless himself betrays a much greater ignorance about what climate change means for us and our economy. Douthat espouses the dangerous idea that doing nothing to combat climate change is the best course for business and for the world.

In doing so he relies on a set of arguments against the pursuit of a clean economy that have little basis in fact and mainly defend the untenable status quo. The overall pitch has two main parts: (a) promoting a clean economy through the use of market mechanisms like cap-and-trade is a perversion of free markets, since the renewable energy industry shouldn't need tax subsidies if it's a real business; (b) going green will cost jobs and hurt the economy. Let's look at both ideas.

First, the notion that fossil fuels do not rely on subsidies is absurd. A new analysis from Bloomberg New Energy Finance compares the roughly $45 billion of global government subsidies for renewable energy (mostly tax breaks) to the $557 billion of subsidies for fossil fuels in 2008 alone. That 12-to-1 ratio of dirty-to-clean subsidies is surely understated. Let's just say that the International Energy Agency, which calculated that larger number, is not a liberal think tank, and it is measuring only the most literal subsidies. In reality, the market for energy is not currently "free" at all. So if putting a price on carbon helps us support new industries of the future, drive innovation and, say, preserve the ability of the planet to support our species, it seems like a good deal.

Second, this general notion that green will hurt the economy is simply the easiest defense of doing nothing. This concept — that that there's some tradeoff between economic development and what he calls a "growth-slowing regulatory regime" — is the heart of Douthat's argument. This idea is so very dangerous since it keeps us tied to the past, and abdicates leadership to other countries that are pursuing the real growth and prosperity agenda.

The most thorough studies — such as the well-regarded Stern Review on the Economics of Climate Change — tell us that the cost of ignoring climate change (including the possible devastation to our species) will be far higher than addressing it. Using less energy and material, or switching to electric vehicles and renewable energy, will help everyone from homeowners to businesses save money. As one CEO said to me, "I don't know about climate change, but it seems pretty clear that producing less carbon is better than producing more."

And the flashy side of this "kill the economy" argument remains the odd notion that a green agenda will kill jobs. Of course it will destroy some old-school jobs, but clearly the move to a clean economy will create jobs as well — millions of them. Installing insulation and solar panels, building wind turbines, and managing buildings for energy efficiency are just some of the obvious ones. Every industry that makes components for these new sectors will also have new markets and customers.

So what part of the economy is actually hurt by the race to clean economy? Which companies will lose jobs? In essence, only one sector, oil and gas, will truly get hit. If everyone uses less in general, and switches from fossil fuels overall, then of course those companies that only provide fossil fuels will shrink-unless they decide to play a role in the new energy economy).

But the big mistake is that protecting these particular jobs, and keeping us pinned to the status quo, does not represent a path to growth. Consider this: at the macro level, the world produces roughly 85 million barrels of oil per day. Nobody reputable seems to think that the number will rise much if at all; in fact, "peak oil" theories have gone quickly from fringe to mainstream (even Kuwaiti scientists recently predicted a global peak in the next five years).

My point is that even with optimistic numbers, fossil fuels are not a growth industry, and not a job creator. Relying on that sector is not a path to prosperity for the world or for the United States. Creating new technologies and products, building greener buildings and businesses, and just plain using less energy to do it all: those actions will make almost all companies more profitable — just not the ones providing only fossil fuels.

Our current path, and commitment to doing nothing, is in effect protecting one sector at the expense of all the others...and risking our planet and economy as well.

(This post first appeared at Harvard Business Online.)

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