Abstract
Climate change is the result of a colossal market failure. At least, that is one way to view the unimpeded dumping of carbon dioxide into Earth's atmosphere. In the case of climate change, the cost of carbon dioxide emissions, measured as damage to the biosphere, has not been factored into the price of energy. The failure to account for these hidden costs encouraged the overuse of carbon-emitting technologies and has led ultimately to the market failure known as global warming.
When markets fail, government institutions often intervene to bail out those companies that face dissolution, as we have seen most recently in U.S. credit markets. Government prevents the market from collapsing completely and staves off even greater losses of jobs, earnings, and livelihoods by providing loans to keep firms in business and by establishing new rules to restructure the industry, with an eye to averting even greater future failures.
Given the enormity of the market failure that has resulted in climate change, one might expect government institutions, with their mandate to serve the greater public good, to intervene to cope with the waste products of fossil fuel-based energy production. For example, the U.S. federal government could step in to increase funding for research and development of technologies that don't contribute to climate change, and help bring new solar, wind, and nuclear technologies to market more quickly. Using public money to restructure the energy market could save the biosphere and prevent further climate change.
Instead, government officials talk of finding market solutions to reduce greenhouse gas emissions without seriously considering substantial public investment in developing new energy sources. During the past 30 years, federal government expenditures for research and development in energy have declined and, at $3 billion in 2007, are less than half what they were in 1978, in real terms. The greatest reductions were in nuclear and renewable sources–that is, the main supply-side alternatives to fossil fuels.
A sudden spike in spending for the development of ethanol-based fuels in 2007 disrupted this trend. The extraordinary increase illustrates another feature of current U.S. energy policy: its susceptibility to special interest politics in allocating research funds. At the end of the day, however, neither market-only solutions, nor special interest politics will provide the timely, science-based policies required to avert calamity from accelerating climate change.
If markets are to be effective instruments in creating new energy policies to address climate change, then government and industry must decide how better to calculate the total costs of energy, who should be involved in setting prices, and who should pay for public goods like clean air and a benign climate. For example, does it still make sense for the U.S. government to continue subsidies for oil exploration and drilling–a practice that masks the true cost of carbon-based energy production–or to refuse to place a tax on carbon dioxide emissions?
The genius of markets is in their self-organizing properties. Out of a series of negotiations among buyers and sellers emerges a relatively efficient means to exchange goods and services. This formula has stood the test of history so far. Based on current observations, however, Earth may not have time to let markets incorporate and correct for the externalities causing climate change. In fact, except for the insurance industry, markets have failed miserably even to recognize climate change. By the time Earth's inhabitants acutely experience the consequences of this market failure–in food shortages due to drought and flood, the collapse of wild fisheries due to changes in ocean habitats, mass human migration as sea levels rise, and increasingly large and unpredictable wildfires–it will be too late to prevent additional catastrophic damage.
Indeed, climate change exposes fundamental failures of markets: Markets do not respond well to forecasts with 50- to 100-year time horizons. Nor do they respond well to the need for quick, large-scale coordinated action intended to yield timely results.
In contrast, with competent leadership, government institutions can mobilize resources, make and execute decisions that reflect a broad consensus, and under some circumstances, act rapidly to meet a challenge. The Manhattan Project, which produced the atomic bomb at the end of World War II, is an example of the power of institutions to bring together intellectual, scientific, and financial resources to accomplish a specific goal. In wartime, governments can organize a nation's talent, resources, and markets. For example, to produce and enrich adequate quantities of uranium to make the first atomic bombs, the U.S. government, working with the DuPont Corporation, created enrichment facilities in Oak Ridge, Tennessee, in 12 months. DuPont also constructed four chemical-separation plants at Hanford, Washington, and even barracks for workers in those factories. In peacetime, as well, governments can marshal public money and talent to accomplish nearly impossible feats like putting humans on the moon, as the United States did in 1970, within a decade of announcing the goal.
At a recent meeting cohosted by the National Commission on Energy Policy and the Harris School of Public Policy at the University of Chicago, representatives of government laboratories, federal agencies, university energy programs, and industry grappled with how best to organize research, development, demonstration, and deployment of new energy technologies. The independent, bipartisan National Commission has deliberated at length on what the United States needs to do to meet energy demands in a carbon-constrained future. Their analysis of energy needs in the face of climate change, their prescriptions for action, and the consensus they hammered out are all commendable and sensible.
Yet, their recommendations fail to prescribe the organizational practices required for the large-scale, coordinated–indeed heroic–mission to prevent further catastrophic changes in the biosphere. Increased funding for research, development, and demonstration are surely required, as the commission suggests, but an even greater challenge lies in how to organize federal agencies, private corporations, university and government laboratories, and venture capital firms so that each performs at its best and all are coordinated to produce timely results.
Participants in the Chicago meeting discussed several different models of cooperation among industry, research labs, and government agencies. Some are industry-led models, such as BP's bioenergy initiative with the University of California, Berkeley; Lawrence Berkeley National Laboratory; and the University of Illinois, Urbana-Champaign. Others are organized by university laboratories in collaboration with private firms, and still others are initiated by the Energy Department or by the system of university- and industry-administered facilities at Ar-gonne, Lawrence Livermore, Oak Ridge, and Fermi national laboratories. Even if a more effective and coordinated system of research and development could be worked out, sticking points litter energy technologies' path from demonstration phase to national and international markets. Complicating the process, U.S. energy policy is the product of myriad standards and rules promulgated by at least a dozen federal agencies beyond the Energy Department. These include the Nuclear Regulatory Commission, the National Highway and Transportation Authority (which sets fuel economy standards), the Minerals Management Service (which licenses coal mines), the Federal Regulatory Commission (which regulates transportation), and the Environmental Protection Agency (which sets air quality standards).
In the face of this organizational complexity, energy development and production entities lack the necessary social compact that would bind their interests together. Such an implicit agreement among interests existed in the post-World War II era, when the United States focused resources on research in such diverse areas as space exploration and cancer research.
Some at the Chicago meeting expressed frustration at the lack of leadership in the face of the climate crisis. Yet, even at this meeting, few concrete solutions or repertoires of action emerged that matched the gravity of the problem. One partial solution, agreed to by many at the meeting, is to place a tax on greenhouse gas emissions. While such a tax would raise the cost of fossil fuels, and make other technologies such as wind, solar, carbon storage, and nuclear more attractive, choices about which technological developments to favor, in what sequence, and with what levels of investment are still not clear. It is increasingly evident that there is no single “silver bullet” to solve the energy problem in a carbon-constrained world, and placing bets on one or another technology is financially risky–perhaps too risky for business firms alone to make.
U.S. energy policy is the product ot myriad standards and rules promulgated by at least a dozen federal agencies beyond the Energy Department. In the face of this organizational complexity, energy development and production entities lack the necessary social compact that would bind their interests together.
While government research and development funding failed to pick winners among energy technologies in the 1970s, the experience of the past 20 years suggests that leaving the problem to the markets won't work either. Neither markets nor government on their own will be able to solve the enormous problem of producing adequate energy supplies while stabilizing the climate. On the other hand, closer coordination between government and private firms, with the support of independent science and technology communities, could provide the best combination of expertise, funding, and influence to begin to solve the energy/climate change problem. Establishing overarching public goals–as the United States did when it landed on the moon–with adequate funding for research and development and clear roles for the public and private sectors may be our last, best chance to mitigate the accelerating effects of climate change while generating the energy needed for economic development.
Are the markets, firms, government institutions, and university research organizations that have powered economic development in the past sufficient in their current combinations to accomplish these goals? Models, plans, and good intentions abound, but leadership on these issues has been scarce. The next U.S. administration must work quickly to establish a social compact on energy and climate change; time is running out.