Opinion

The Great Debate

A stimulating energy policy

January 28, 2009

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- Robert Engle is the Michael Armellino Professor of Finance at New York University Stern School of Business and a Nobel Laureate. His views are his own. -

We have faced energy crises before. The last energy crisis was about running out of oil. This one is about the fear that we might not. The future health of our planet is jeopardized by the greenhouse gases emitted by our industrial society. But can we afford an expensive energy policy in this time of economic distress?

The simplest and best solution to reducing emissions is thought by most economists to be a comprehensive tax on the emission of greenhouse gases. Only in this way will individuals and businesses that avoid the tax be doing what is socially desirable. Only in this way will it become profitable to find substitute energy sources; no longer would it be necessary to subsidize alternatives. The price of oil will rise naturally when we begin to run out, but in this proposal, the price would rise before we reach the bitter end. It is only a matter of timing.

However, a tax is generally considered politically impossible and in this time of deepening recession, it is especially unpalatable. But what about the money – what happens to the money that is raised by this tax? This revenue could be divided evenly among all U.S. residents and sent out in a periodic cheque. This check could even be sent before the tax revenue was received. A substantial emission tax would generate a substantial check. This could be used for anything but might well be used to buy a more fuel efficient car, insulate a house, move closer to work or otherwise reduce the impact of the impending tax.

Because this tax would be returned to consumers, it would stimulate the economy. The sectors that might expect benefits would be automobiles, construction and real estate. These all can use good news. Because of the per capita redistribution, this would be particularly beneficial to low income groups who would pay less than an equal share of the taxes. Because the tax would reduce our consumption of oil, we would be sending fewer petrodollars abroad and instead returning it to Americans.

We already know that high oil prices induced dramatic changes in our economic behavior which had clear benefits for reduced emissions. Driving miles fell, sales of SUVs fell and the only growth areas of automobile sales were in small cars. Housing prices fell more in the distant suburbs than in the central cities, and public transportation rider ship increased. But these gains are now being reversed as the price of oil has dropped dramatically.

In order to achieve the long term climate benefits, it is necessary to insure that there is a permanent shift in the price of emissions rather than a temporary shift. Car buyers, home buyers, builders, public transportation planners and alternative energy producers will reverse their decisions and reduce their investment and research unless they are assured that oil prices will stay permanently high.

When the recession is over, it no longer makes sense to redistribute the tax revenue. Instead, the revenue could be invested in a sovereign fund, passively managed and dedicated to the major unfunded social costs of the upcoming decades – social security and Medicare. The fund should be managed by a semi-independent agency much like the Federal Reserve. This agency would monitor the progress on reduction of greenhouse gasses and recommend adjustments in the surcharge.

One policy will solve both global warming and long run fiscal deficit. Workers several decades from now will not have to be taxed so heavily to support social security and they will not have to be taxed so heavily to solve climate change. The long run risks offset. Essentially the tax on income and payroll is replaced by a tax on carbon. The tax is placed on a “bad” rather than a “good.” Today’s working generation will in part save for its own retirement out of this tax revenue.

What happens if we are wrong? Suppose the planet is able to fix itself. Suppose we find an inexpensive way to sequester carbon dioxide. Then would we have broken the economy for no good reason? The answer is that we would have stimulated the economy in the recession, saved the social security system, improved our balance of payments and increased the time until we exhaust the world’s petroleum. This is not a bad outcome.

Comments
3 comments so far | RSS Comments RSS

Engle is talking great sence.This is a policy that could be replicated arround the world.
Gordon Brown should take note.

Posted by Aaron Newell | Report as abusive
 

Tackle the problem of energy generation and global warming in the manner of a Manhattan Project/Hoover Scheme. Government supported projects to generate energy from sun, wind, tides and geothermal sources would keep all the unemployed in work for many years to come, and the benefits would be enormous. In work people could pay off their homes, abundant non-polluting energy would stimulate the economy and the oil producers, who started the problems way back by stimulating inflation would get their just rewards.

Posted by Harold Roper | Report as abusive
 

When I was sick as a kid, mom made soup. Not always the best tasting but it was reassuring, healthy and warm. The “answer” is close to mom’s stew. Too much pepper or not enough meat and sometimes over cooked…so add what is needed as you eat and recooperate. Don’t wait forever to get the perfect recipe. Business is starving. And don’t hand all the ingrediants to the same chef that cooked up the last bubble of growth. New (as in next-generation) macros for our childrens financial health will evolve just as surely as the credit card was like crack to this “me” generation. Green will dominate, so get used to it. Invest, develope and embrace it. Teach the world to fish not beg or revolt. Visualize large areas of water filled with desalination plants powered by floating wind/tide/solar arrays pumping life into the new deserts of the warming planet. Science seems to drag behind occasionally so be patient George Jetson. Don’t expect miracles from politicians or preachers or hedge fund managers. Real people solve real probems.

Posted by James Parker Memphis, Missouri | Report as abusive
 

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