Climate Legislation Could Actually Spur Economic Growth

If you’ve paid attention to the debate over cap-and-trade legislation, which has already begun its run through the Senate this week, you can easily spot the partisan arguments. Democrats and the liberal environmental groups that follow closely behind claim that in order to adequately mitigate climate change, we need to change how we think and what we do, starting with monitoring and taxing carbon emissions. Republicans, on the other side, see any departure from the current energy policy as an economic stop sign—an unnecessary burden that will reduce the incomes of the lower and middle classes.

Over at Worldchanging magazine, executive editor Alex Steffen has some number crunching that seems to bunk some of the structure of the current debate. Critics of any form of climate bill argue that carbon-monitoring legislation would stunt economic activity. But could climate action, he asks, actually accelerate the growth of the economy? Through some nifty economic reasoning, the answer is yes.

To counter the argument that the energy economy would grind to a halt if the president were to sign a climate bill, Steffen points to an economic principle called Harberger’s Triangle, named after an economist of the same name. In terms that the noneconomists among us can understand, Harberger accounts for the economic growth that is surrendered when the government imposes limits that weren’t there before, like in the case of carbon legislation. But this surrendered growth is not a loss. Instead, it’s actually a transfer of economic activity from the emitters to those who monitor the system and grant the permits to emit. The only real loss is what Harberger’s theory calls dead weight, which accounts for the inefficiencies in the system. And if we’re really in pursuit of economic efficiency, the inefficiencies should be abandoned anyway.

Yes, it’s a convoluted and immensely theoretical argument. But here’s what you need to know: the loss that many critics suspect would come from such a bill appears objectively minimal. The nonpartisan Congressional Budget Office characterized the economic loss of the House climate bill as being between 0.2 and 0.7 percent of GDP in 2020.

As percentages go, that’s a pretty small one, but still not insignificant. With U.S. annual GDP at nearly $14 trillion, even 0.2 percent can turn into a pretty big number. A much number, though, is the economic value of ecosystems. Natural resources like clean air or the geography of land provide a value that's not calculated by any industry, but are the foundation on which the economy was built. A European Commission (directed by the meeting of the G8 in 2007) calculated the value of the ecosystem's natural processes to be between $2 trillion and $5 trillion dollars each year. It's a wide range due to many unknown variables. But the value is so significant because of humans’ inability to replace environmental structures, like water and agriculture systems, once they’ve been damaged by the effects of too much carbon in the atmosphere.

They’re all numbers worth chewing on. What’s indisputable, however, is that under either cap and trade, a carbon tax, or any other way to reduce emissions, the system provides fertile ground for new industries (like renewable energy) to crop up and maintain, if not surpass, current economic activity. Such a system would also offer an incentive for companies to do things better—to run cleaner, more efficiently and ideally, cheaper. Broad economic growth and efficiency is essentially that: the same if not more output, all with less input.