The Power of Economic Incentives

By David L. Brown

How do  we go about reducing carbon emissions to prevent climate change from spiraling into a global catastrophe? One obvious answer is to slow down the go-go industrial economies that pour CO2 into the atmosphere. Not so easy? Well, actually we’re already doing it, according to this article in today’s New York Times. The story leads off with this:

Global carbon emissions are expected to post their biggest drop in more than 40 years this year as the global recession froze economic activity and slashed energy use around the world.

The decline comes as political leaders are struggling to come up with a common approach to dealing with climate change.

The main factor behind this year’s drop in emissions is the slowdown in industrial activity and trade around the world, according to a study due to be released in November by the International Energy Agency.

But the energy agency, which provides policy advice and research to industrialized nations, found that government actions had also contributed to the drop in emissions. The agency said it expected to see global carbon emissions fall 2.6 percent this year.

So, see, we can do it … all it takes is the economic incentive to decrease the use of fossil fuels. There is no doubt that last year’s spike in oil prices has a lot to do with this.

The Times gives credit to the economic bust and “government actions,” but there is another important aspect to this, perhaps the most important one of all. Millions of individuals have learned to think twice about driving unnecessary miles, leaving the thermostat at extreme settings, or letting the lights burn all over the house 24/7. They’ve made personal decisions to reduce energy use.

That’s called conservation, and without a doubt conservation is the easiest and most effective way to deal with CO2 emissions in the short term. The more people become conscious of their contributions to carbon pollution and take steps to reduce their “footprint,” the better for all of us.

And what is the secret behind all of this? It’s easy. Think Bill Clinton’s campaign theme: “It’s the economy, stupid.” Yes, the high price of oil and its economic effects — from international trade right down to individual household budgets — is the reason why carbon emissions have dropped.

Your ordinary Joe may not understand global warming or even give a hoot about the environment, but he does react when he sees his wallet taking a hit. Like most of us, he’s on a limited budget, so when the cost of profligate energy use starts to hurt, he does what he can to save money. In this case, he stops using as much energy.

A major reason why alternative energy sources have been slow to arrive on the  scene is that petroleum remained relatively cheap for far too long. In their self-interested way, for decades OPEC and major oil companies did everything in their power to hold down costs and stifle alternatives. They did it by using the  power of supply-and-demand, turning up the pumps whenever there was a new spurt of interest in alternatives. They played that game for years, until it became no longer possible.

It is fairly well documented that the Oil Peak has been reached, or at least we are teetering on the top. Beyond lies the downside slope of the Hubbert Curve, leading to a time when demand for oil cannot be met by supply. That means sustained higher costs for petroleum, which will introduce new opportunities for alternatives. We are already seeing voluntary conservation in response to costs, and as time goes on, we’ll undoubtedly see more people embracing alternatives. After all, the human race has been labeled Homo Economicus, “economic man”. Create an economic incentive, and humankind will react accordingly.

There are limits to how much conservation can do to turn around carbon emissions. Of course, none of us want an endless depression to “solve” the threat of climate change. But there are lessons to be learned from the recent experience, and we need to act on them. In fact, the very forces of  economics will make  it almost automatic, because dwindling oil resources will make it difficult or impossible for the world economy to enter a new “bubble” of rising  expectations. Less oil means higher prices, and we have seen that higher prices will put a lid on demand.

We can hope the world economy will begin to edge back from the brink, but we can’t afford to return to the same-old, same-old process of driving economic growth through continued use of fossil fuels. We need to begin to move toward new-style economies that are based on sustainable and environmentally friendly models.

Can we do it? Who knows — but since there’s probably no alternative it would be best if we at least try.

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