The numbers are truly staggering. The world's population has increased over sixfold in the last two hundred years and will grow at least half again as much in the next few decades. By 2050 population is to reach a peak at 9-10 billion. To not only keep real per capita income at its present level but to lift as many of the billions of the world's poor out of poverty, the world economy must continue to for quite some time. Unfortunately, on average each percentage point increase in the rate of growth in gross world product leads to an increase in CO2 emissions of .4%. (For information on how substantial the differences are from country to country, click here.)
The two key sources of CO2 emissions are the burning of fossil fuels and deforestation and both are related to population growth and development(For more on the deforestation of tropical forests in places such as Brazil and Indonesia. click here.) The historically unprecedented growth in real income and population is founded first and foremost on the use of natural resources. With the industrial revolution we swapped tools made principally of wood and leather and powered by human and animal muscle for machines. The premodern economy was an organic one limited in its potential by what little of the flow of the sun's energy we could capture each year. Our modern industrialized world is an inorganic one where we draw from the age-old stock of solar energy found in oil, coal, and natural gas. While great strides have been made in limiting the growth in the use of nonrenewable resources since the 1970s, the fact is that the world economy still runs on fossil fuels. Some 80% of power we use comes from fossil fuels, principally oil, coal, and natural gas. Already having exploited the highest quality and most easily accessible ores and fuels implies that, all else equal, we face a future of increasing costs. Part of the current run up of oil prices reflects the impact of increasing demand in the wake of growth and development. Added to this continued growth in population and production means increasing amounts of waste that must either be stored or recycled. One can see that the benefits to "going green" (shifting away from nonrenewables and other forms of pollution control as soon as we can) are great while the potential costs of inaction are to say the least considerable.
All of us seek to capture the benefits that, through our activities, we are legitimately entitled to. All of us try to avoid bearing any more of the costs of actions than we are legitimately expected to bear. We are not wrong for doing this. Looking at life as a pyramid, I should hope that we would all agree that at the very base of that pyramid are our family and friends. To give away benefits that rightfully belong to us or to voluntarily bear costs we aren't expected to means giving away what is ours to someone or something far more distant from us, far less connected to us in space and time and denying these things to those within our own circle.
The problem we face when thinking about environmental issues begins with the guilt we feel once we have admitted this. Add to this the fact that each one of us is such a small part of the overall picture. Often when we do things that will help the environment we know what we're giving up at the same time we realize that there is little or no guarantee that the additional costs we have taken on or the benefits we have turned over to some one else will really make a difference. This helps to explain why when left to individual initiative not enough tends to get done. When it comes to the environment, we often face a classic coordination game situation in which doing what is best for ourselves and society at large is only really worth our while if we can count on a sufficient number of other people moving forward to do the same thing. It is wasted effort to blame government, what's going on elsewhere in the world and, perhaps, most importantly, feeling too guilty. It is far better to focus on what can be done now because something must be done.
The good news in that contrary to the old adage she who hesitates is lost there are increasing numbers of nonprofits, for-profit companies, and individuals, both in private and public life who have broadened the base of their pyramid and coordinated their actions to include people and things far more distant than them in space and time. And the more movement in the right direction that takes place, the easier it is for others to follow, especially once a critical level of forward movement has been reached. Compact fluorescent lights or CFLs are an example of this.
While CFLs lights not all that long ago were relatively expensive they are now well within the range of incandescent bulbs. While true they are still more expensive than incandescents they are no longer outlandishly so. And in the long-run they are far cheaper to operate. They last longer and are more energy efficient, using fewer watts of power to generate the same amount of light. (a, b) The drop in price in the U.S. market is arguably in no small part due to actions taken by government in other countries and in anticipation of similar actions soon taking place elsewhere. By stimulating the demand for CFLs two things have happened. One, to the degree scale economies are important, by increasing demand it has become possible for major players to ramp production to a level at which overhead can be covered with a much lower premium charged per bulb. Secondly, more current demand (and more demand still expected in the future) has increased the amount of space available for the number of companies needed to serve this market. Regardless it is evident that the last couple of years we seem to have reached (or are at least close to reaching) the critical level needed to sustain change. Incandescant bulbs have been banned (the Philippines, Australia, Ireland, and Italy), CFLs have been given away for free by the government (Venezuela and Cuba) or made available to the public at a subsidized price (Brazil). (c)
With 17% of residential electric consumption in this country for lighting, with say 52 light sockets in the average home at present using incandescent bulbs, and with an average savings of about 45 kwH per bulb installed the potential impact of a switch to CFLs is considerable (d). The savings of 2340 kwH per home is equivalent to a little under 3 months of power consumption for the average home. (e, f).
Much like CFLS, government bans or taxes on plastic bags in many key markets (country-wide in Ireland, the U.K., Bangladesh, Taiwan, and Australia and in cities like San Franciso or Mumbai ) have led businesses, one should imagine in anticipation of similar taxes and bans, to introduce reusable plastic bags and encouraged the growth in their production. (For more on this click here or here) Change in other areas such as in heating and transportation is far more problematic Often this is because change requires much higher initial costs or, if financed in some way, much higher fixed costs. To "go green" is in many case a decision to become less liquid or more highly leveraged. Consider first the case of hybrid cars.
To many it is surprising to note that that outside the triangle that extends from Boston down to Washington D.C. and from there westward up to Chicago one finds some two-thirds of America's population. This means that fuel efficient cars are an absolute necessity because whatever the benefits of mass transit outside this area, people are by and large too scattered and too sparsely settled for mass transit to be feasible. That something vis-a-vis cars needs to be done soon is borne out by the fact that some one third of CO2 emissions in the U.S. is emitted from cars.
However, hybrid cars are still costly. Even with gas averaging $3.28 a gallon nationally and 3 year new car loan rates at 7.11% given current differentials in terms of price and mpg, a hybrid Honda Civic is just barely less costly to buy and run than a Honda Civic sedan. And a decided disadvantage is that while given superior mileage the operating costs associated with a hybrid are far less than a regular car, the initial outlays and the monthly car payments one is commited to are far higher. To buy a greener car means that one must be willing to become less liquid (i.e. pay a higher amount out of pocket rather than finance the purchase, bring monthly payments down. This means having less cash on hand) or become more highly leveraged (commit to higher fixed expenses in the form of monthly car payments). Given current rates and the price differential on a hybrid versus a regular Honda Civic sedan this commitment boils down to agreeing to spend 50% more a month for the hybrid than the buyer of a regular but reasonably fuel efficient car is committed to pay. Government agencies or non-profits -with the public interest in mind- have shown themselves willing and able to sacrifice liquidity and increase their financial leverage in a way that private families and for-profit businesses understandably have not. (For example the city of Rock Island, Illinois has just purchased a fleet of twenty-one Honda Civic hybrids. Click here for more details.) Being greener in the case of hybrids means being drier (less liquid) or more precariously positioned (more highly leveraged)
Because of the absolute costs , it is unlikely we shall anything like what has happened with CFLs, that might tip the scales decidedly in favor of hybrids, any time soon. In short, we will not see a ban on regular gas powered cars or say subsidies to reduce individuals' initial outlays on hybrids. For example, consider the cost of government subsidizing the purchase of hybrids. In 2004 over 7 million passenger vehicles were sold in the U.S. Assume that government tried to encourage everyone buying new cars to buy hybrids by covering the gap between the price of a hybrid and its less energy efficient counterpart. Further assume that the average subsidy would have to be $7,590 (the current gap between a Honda Civic hybrid and a regular sedan). If all accepted the offer the cost would be a total of $53 billion. Here what we face is a classic example of what is referred to as a lock-in effect (and what Environment Illlinois recently referred to as "a chicken and egg problem".) Until demand is high enough and therefore the production of hybrids has increased to a point that scale economies can be realized and market share increased in order to close the gap between hybrids and gas-powered cars, we are trapped in a situation in which the purchase of a hybrid will require both a sense of commitment to the environment and the financial resources necessary. No matter how little gas a hybrid uses, as long as the initial outlay is greater than a fuel powered car, concern over loss of liquidity or leverage can be expected to remain obstacles to a significant shift. (There is also a question of how much can be gained by simply driving better maintained gas-powered cars more slowly.)
There is another problem that arises with hybrids and other big ticket items. New ideas are constantly coming up. The X prize competition slated for next year is paying $10 million to the first team that develops a working model of a car that gets at least 100 mpg and can be brought into production at a competitive price. Motor Development International, a French company has developed vehicles that run on compressed air that takes only a matter of minutes to re-fuel. There is a three-wheeled hybrid that while it only seats two passengers, the Aptera, gets 330 miles to the gallon. Logically one must ask which alternative will ultimately win out and will there be significant disadvantages to having committed to one alternative too soon? For example, a firm that buys a fleet of vans from Motor Development International may find that in ten years time there are few if any technicians who can service an air car because hydrogen fuel cell or solar powered cars have come to dominate the market. The value to all of us as individuals of waiting means that movement in any one direction is of necessity far slower.* (While Steven DeCanio in his 1998 paper, "The efficiency paradox: bureacratic and organizational barriers to profitable energy-saving investments" Energy Policy, April 1998, argues that often organizational inertia rather than economic considerations impede the adoption of greener technologies, he also finds statistical results that indicate that the later firms entered the EPA's Green Light Program the less time that was required to recoup initial costs, i.e. the shorter the payback period. He admits that this was possibly due to "...continuing technological progress over time, or to declining costs of the equipment as the market for it has grown" , p. 451. This is consistent with the argument put forward by van Soest and Bulte that with the variety of alternatives available, the direction of technological change so unpredicatable, and the commitment that investment in any one particular technology entails, there is a real value to waiting. See van Soest and Bolte, "Does the Energy-Efficiency Paradox Exist? Technological Progress and Uncertainty" Environmental and Resource Economics, 2001. This is remiscent of the Christine Romer's irreversibility hypothesis. )
The same problems associated with cars applies to power and heating technologies as well.
Wessel and Jones in their book _Prosperity_ write beautifully about how important the introduction of electricity was in the development of the world economy. Here in the U.S. a large share of our electricity comes from coal-fired plants and some 40% of our CO2 emissions comes from generating electrical power because nationwide a large share of the power generated is from coal-fired plants. According to Environment Illinois's recent report "The Power of Efficiency" only 31% of the demand for electricity in the midwest is residential demand. Commercial businesses and industry therefore account for the rest of the overall demand for electrical power in the midwest (as well as over half of the demand for natural gas). This leads to the question of alternative power sources such as wind and solar.
Unfortunately we are a long way off from either solar or wind being a viable alternative to typical large scale power plants. (i). High quality wind sites generate about 30 to 40 percent of their rated capability on average (this is because of wind speed variations) h and given the considerable scale economies involved in wind power(evident in h above) the feasibility of installing and using our own wind turbines to generate much power seems foolish. Solar panels in this regard hold out far more promise. However, solar panels face the same obstable that more fuel efficient cars face. However much cheaper they are to use once installed, the upfront costs of solar power, like fuel efficient cars. are considerable. An added problem is the use of silicon to make PV cells and the capacity of the system to supply the solar industry with a sufficient quantity and quality of silicon if there is a substantial increase in demand.
Citizenre is attempting to significantly reduce the initial outlay required of consumers. However there are serious questions about what might happen to the solar power industry in the U.S. if Citizenre fails and serious questions about their ability to fulfill the promises that are being made.g Regardless, solar plants on average generate even less production than wind-farms do, usually less than 25 percent of their rated capacity. This is due to generators not producing electricity during the nighttime or during cloudy days. Finally, it is indeed sobering to consider the fact that currently all the solar panels with a connection to the power grid provide no more power than one medium coal-fired plant.
And again the range of alternative new technologies increases the value of waiting. For example, great strides in micro combined heat and power systems (micro CHPs), the residential equivalent of CHPs used in commercial and industrial buildings represent yet another alternative to coal-fired plants and to central power stations. Although CHPs run on natural gas 90% of the heat and power generated is used versus 30-40% for power transmitted from a central power station. Here too however, unless subsidies are added at present the initial costs of installing such a system is far greater than that of installing a new high-efficiency hot-air furnace (according to one source $6,000 more even after gas company rebates).
Michael Porter and Claas van der Linde in their paper "Toward a New Coneption of the Environment-Competitiveness Relationship" (Journal of Economic Perspectives, Fall 1995) argue that rather than environmental regulation always hurting businesses' profit there are instances, many they would argue, where regulation has raised businesses' profits and increased their competitiveness. Although they do not quite develop their argument along these lines they nevertheless hint that one one the principal advantages created by regulation is that it closes off some of the "numerous avenues for technological improvement" which therefore no longer vie for executives "limited attention" (p. 99). The relatively new branch of economic theory called behavioral economics draws our attention to the marked tendency we have to prefer the status quo, especially when the alternative choices that confront us are so numerous that they are overwhelming. If there is truly any merit to Porter and van der Linde's argument it is perhaps due to nothing more than simply our preference for the known (i.e. the status quo) and our subsequent fear or discomfort with the unknown together with our realization that individual efforts will only matter if done on a large enough scale, by a sufficiently large number of businesses and individuals. Whether it takes the form of government regulation or it is self-imposed, pressures to change, actions to limit choices, and measures to guarantee enough broad effort to make the individual cost and discomfort worthwhile are all required.
As the International Labor Organization argues given the simultaneous goals of reducing global poverty and control damage to the environment, the impact of greener technologies on employment has to be considered. The good news is that there is no real conflict between jobs and green technologies. At the same, the research suggests that the direct impact of "going green" is slight. (see the ILO's "Green jobs: Facing up to an "inconvenient truth") For example, an increase in recycling creates an increased demand for labor (to drive recycling trucks and sort through recylables) however it will reduce the amount of garbage that ends up in landfills and therefore reduces the need for labor there. Or as the ILO report notes, increased use of mass-transit creates more jobs for bus drivers but reduces the demand for gas station attendants and auto mechanics). Perhaps the most promising area is in construction. It is noted in the ILO report that one of the most significant areas for reducing CO2 emissions (possibly as much as 20-30% in both industrialized and developing economies) is in increasing the energy efficiency of buildings, mostly in the form of increased insulation. Germany's Alliance for Work and the Environment is given as an example. As described in the ILO report, the Alliance is a joint iniative of government, builders, environmental groups, and trade unions that with a $1.8 billion initial investment has improved the insulation of 265,000 apartments, created 190,000 jobs and, via reduced unemployment, reduced heating bills, and the increased tax revenues from higher incomes and such has generated benefits of some $4 billion. Based on the success of the initial $1.8 billion, the German government has committed itself to spending $8 billion more between 2006-2009.
Although I am not aware of any direct way of measuring this, it is remarkable how much more attention the environment has received, especially in the last year or two. There is really no other issue that is of more importance than that of the environment. Through economic and population growth we have come to a point where we now are pushing uncomfortably close to the constraints imposed by the planet. Let us hope that we have shifted our focus in this direction at a point in time where it is possible for us to change course.
