Cross Post from RealClimateEconomics.org, a project of Economics for Equity and the Environment Network (E3). E3 Network is a national network of economists developing new arguments for the active protection of human health and the environment. E3 Network is an affiliate of Ecotrust.
Reading Juliet Schor’s excellent new book, Plenitude, has left me thinking about whether a country can be both rich and green. We can see the challenge by considering whether a person can be rich and green. Suppose a millionaire spends a big chunk of cash on cost-effective, high-efficiency technologies for her home. So she has a super green house, that reduces her footprint, and saves her a lot of money. What does she do with all those pesky left-over dollars? She spends them on something else, increasing her footprint.
Schor’s book has a terrific discussion of this so-called “rebound” critique of technology-based policy. Steps taken to promote eco-efficiency have hidden, counterproductive effects. Take for example, the EPA’s move to increase fuel efficiency to attack climate change.
Suppose you double fuel efficiency: consumers can drive equally as far on half the fuel. The well-known rebound effect is what economists call the substitution effect. Consumers, facing a lower effective price for travel, will take some of that back by travelling more than before. Common
estimates for this effect are on the order of 10%. Less well-studied is the income effect: consumers will take the money saved, and spend it on goods of varying embedded energy. If those goods have, for example, a lot of coal-fired power embedded in them, the net result might be an increase in global warming pollution.
The apparent way to avoid this problem is to raise the price of dirty fuels with a carbon pricewhich we haven’t gotten yet – and couple that with Obama’s cleaner car policy. But that doesn’t really solve the problem. You still have to spend the carbon taxes or permit revenues on things that use energy. So at the end of the day, you can eliminate the substitution rebound effect with price policy, but not the income rebound effect.
The underlying challenge here is that rich people or countries buy a lot more stuff that uses a lot more energy than do poor people or countries. Changing the technology mix is only part of a problem, particularly in a world economy where dirty energy is persistent in many countries, and the carbon content of imports will have a big impact on a rich country’s footprint. So is it possible to attack “overconsumption” directly?
In my textbook, and following Schor’s earlier work, I talk broadly about three policies, beyond pricing energy correctly, that might reduce private consumption, and/or shift it in a cleaner direction, while increasing leisure time: consumption taxes; restrictions on advertising; and government-mandates for longer vacations or shorter work-weeks. These are all in place to varying degrees in western Europe, and we can look to, say, Germany for what the US might look like with aggressive “overconsumption policy” in place for a few decades. Germans, with per capita GDP about 25% less than the US, use about half as much energy as Americans do, and have about one-half of the carbon footprint.
Some of this is the energy mix in Europe (French nuclear or Danish wind), and shorter travel distances in small countries. But some of it surely is the distribution of spending. Casual observation suggests that the primary result of higher taxes is that, while European and Americans live virtually identical consumer lives, Americans supersize it: bigger houses, bigger lawns, bigger cars, and more stuff (clothes, lawn care items, boats) in bigger closets and garages.
So if Europeans are (almost) as rich on average as Americans, but have less stuff, what do they do with their extra money? Why isn’t the income rebound effect showing up as a high carbon footprint? More specifically, why doesn’t government spending out of higher taxes make up for the energy savings that consumers are choosing? European governments don’t spend more on health care or defense: we do. So what is that European governments are buying with their tax dollars that doesn’t seem to add much to their carbon footprint?
A couple of possibilities. 1) Much of government expenditures in Europe are transfers or salaries—with the money going right back to fund consumption by folks on unemployment, maternity leave, or in school. So one hypothesis is that more equal income distribution means less energy intensive national consumption (though I don’t know why). 2) Government responds to the higher prices for energy as do consumers, and this drives a less energy intensive spending mix. 3) Those higher government tax revenues enable more aggressive investment in cleaner electricity and transportation.
My point here is that, in spite of the income rebound effects Schor talks about, it does seem possible for a country to be both rich and have a relatively low carbon footprint. The answer seems to be a mix of aggressive technology policy, enabled by policies promoting private consumption restraint and leisure enhancement.
Of course, to do their part in stabilizing the climate, Europeans and Americans will both have to cut emissions by 80% or so by 2050. Not easy, but easier for them than us given their head start.