New energy policy

Good afternoon,

President Barack Obama spent a goodly portion of his week on energy policy. Details of his proposal are as follows:

• Obama believes that his plan will create up to 460,000 jobs
• Over the long-term he hopes to create millions of jobs by investing $150 billion to help private companies further develop clean energy, such as: wind, solar and geothermal
• He plans on: investing in clean energy; increasing fuel efficiency standards in vehicles; and reducing green house gas emissions (hello Beano!)
• By 2025, 25% of U.S. energy will come from renewable sources

Generally speaking scientists are strong supporters of the proposals, while economists have given the suggestions mixed reviews. The economists who object generally feel that it is important to focus on short-term economic stimulus and long-term investments. In other words, their criticism is really a hope that Obama gets the balance between short and long-term correct. My response to that is that all investments are made under uncertain conditions and the ex ante probabilities being assigned to possible outcomes are not likely to be the same as the ex post facto probabilities. The long-term future is even less certain, yet we are confronted with a long-term problem as a people: the environment and the energy sources that we use to pollute the environment must change. Inevitably the way to deal with a long-term problem, such as global-warming, is to start NOW and adjust to changing circumstances as they arise. At this point it is pretty definitive scientifically that action needs to be taken to address environmental degradation NOW. So any possible economists criticism must necessarily be taken with a grain of salt, as the alternative of taking no action is really not acceptable.

This is not license for imprudence, but Obama is not implementing a plan which anyone considers to be outside of the realms of grounded reality. I note with particular interest that the primary objector to the plan is the Cato Institute, known for its Republican sympathies. Typically economists, even environmental economists, are comparing benefits vs. costs in their analyses. In the current situation, any objection could only come because perceived benefits of clean energy policy are thought to be too low relative to perceived costs. But at this point, the primary costs, namely a failing global environment (yikes!), are fairly well known within an acceptable range. So action must begin and adjustments to the course made as necessary.

I might also add that there is a danger that none of this, benefits or costs, is estimated reasonably by economists. After all, had we known with a given certainty the environmental costs of the use of fossil fuels, they would have been much more expensive from the beginning back in the 19th Century as those costs would have been baked into the price of the resources. So there is a huge chance that all of the analysis is wrong. However, this is one of those Faustian moments where we are confronted with a problem whose potential risks of getting it wrong (i.e. global warming run rampant) are sooooo large, that we must be prepared, at almost any cost, to fight it. I liken the global warming problem to that of fighting an unavoidable war on your own territory to defend your family, friends, land and way of life. Do you really have a choice economically to fight such a war? Are you really concerned with benefits vs. costs as a motivated enemy holds a gun to your head? No, obviously not. And this visual should serve as the extreme end of a continuum of possibilities when we are talking about renewable energy policy. And the prudent thinker asks herself, or himself, what the likelihood is of the disaster scenario. Put another way: Would diplomatic policy in Europe and the U.S. have been different in the run up to the two World Wars, if we knew ex ante the costs of those two wars? I think the answer is probably: yes. But, in this instance, we are not talking about the vagaries and unpredictabilities of human beings, but the greater certainties of laws of physics. The environment is degrading and it is almost beyond doubt that human-activity is the cause of that degradation. The effects of that activity are already noticeable and with good probability: predictable. Thus, we must act.

Oh yeah, and we might create the foundations for the U.S. economy for the next 50-60 years by acting now.

With respect for all view points,

Jason