Thursday, March 18, 2010

The best news for cap-and-trade you’ll never read

The entire right-wing opposition to cap-and-trade rests on a single assumption: that economic growth and energy use are inexorably linked. If you believe that higher energy prices (which over the long term reduce energy use) will hurt economic growth, you have to believe that the economy can only grow if it uses more energy.

Energy efficiency advocates have long known this to be false.  Liberals understand that it’s possible to produce more goods and services without using more energy. And the evidence that this is true continues to grow. Reuters is reporting that “Global oil intensity—oil demand growth divided by economic growth—has fallen by about 2 percent a year over the last decade and the decline is now accelerating.” I’ll quote the article at length:

The world may soon achieve something long dreamed of by governments and policymakers: higher economic growth without using more oil.

Rising efficiency, conservation and substitution are steadily reducing the amount of oil needed to fuel an increase in the goods and services produced around the world.

Oil demand in the rich, industrialized countries of the West already appears to have peaked and the trend in developing economies is towards an ever-smaller increase in the amount of oil consumed for every extra unit of economic growth.

Global oil intensity—oil demand growth divided by economic growth—has fallen by about 2 percent a year over the last decade and the decline is now accelerating, spurred by high oil prices, moves to alternative fuels and measures to curb global warming.

This does not yet mean that absolute oil consumption is falling because population growth and rising wealth in poorer parts of the world will push up oil consumption for some time.

But it does mean global oil use will eventually peak and start declining—and "oil-less growth" may not be far away.

"The rate of decline of oil intensity will accelerate," said Eduardo Lopez, oil demand analyst at the International Energy Agency (IEA) in Paris, which advises industrialized countries.

"There is a structural change—difficult to measure admittedly, but clear—that demand for burning fuels is no longer what it used to be."

This is great news for cap-and-trade. Or rather, it would be if politicians actually cared about economic growth instead of simply protecting influential industries' share of economic growth. Everyone with the most cursory understanding of the issue has known for years that energy is becoming less critical to the production of goods and services—and not just oil. Energy Information Administration (EIA) data shows that energy intensity for the economy has declined by about 1.5% per year from 1980-2006:

U.S. Energy Intensity (1980-2006)

[Link to graphic:]

In other words, the Republican argument that pricing energy properly would hurt economic growth has never had a leg to stand on, and now even the bloody stumps are being trodden into the dirt. That reducing energy use does not hurt economic growth has always been true—it’s at least refreshing to see one media outlet report it.

(Note: what I’m not saying is that putting a price on carbon pollution would not have short-term costs as businesses pay more for energy. However, those costs will quickly disappear as clever innovators figure out ways to produce goods using less energy—unless you doubt the American entrepreneur’s ability to respond to market forces.)


  1. The stabilization in oil use by developed economies is great. The Bush Administration liked to emphasize energy intensity rather than those troubling carbon dioxide emissions. The reasons were several: they could boast that the US was becoming (inadvertently?) more efficient. Our economy is more efficient than China, so such a metric would put the onus on the Chinese to change.

    The downward trend has been happening to the US economy (and industrialized nations) since the 1800s. But that didn't slow the exponential rise in the global economy or associated CO2 emissions. With few energy resources, Japan took the oil shocks seriously and put teeth into their efficiency standards. They are about twice as efficient per output as the U.S.

    I think two other points are more important. The US insisted that cap and trade be included in the Kyoto Treaty because of the success we'd had controlling sulfur in acid rain and CFCs.

    The second point is that all the major environmental laws passed in the last 40 years have ended up being cheaper than the costs presented to Congress. Market mechanisms work well at selecting the most efficient set of responses.

  2. I'm all for serious action on carbon emissions, but I'm afraid I don't buy this. You have not shown that economic growth doesn't need energy growth, only that economic growth can occur with a little less energy than currently. While this ratio may continue to improve, I don't think we can assume that it will automatically reach zero.

  3. Byron - Good point. I probably need to parse my argument a bit.

    My argument isn't so much that economic growth doesn't require ENERGY growth. It's that economic growth doesn't require FOSSIL FUEL growth. As the costs of renewable generation fall, and energy efficiency improves, we'll be able to grow more while reducing fossil fuel consumption.

    The assumption cap-and-trade opponents make is that reducing fossil fuel use will always lead to lower growth, which this evidence proves wrong.

  4. Yes, that is a much clearer argument. And is what I assumed you were trying to say. Sorry for being a bit obtuse in my criticism.

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