The Economics of "Going Green"
By Arnold Kling
A reporter called me to give the “anti” side of the case for going “green.” It’s not hard. It is a matter of basic economics.
1. Suppose that a gallon of gas costs $2.50 and an hour of labor costs $10. If you are a business, then you should be willing to use an additional quarter hour of labor to save a gallon of gas. No more, no less. If it takes an additional hour of labor to save a gallon of gas, then the market prices are telling you to use the gas, not the labor.
2. If you are an anonymous, competitive firm, you have basically no choice. If you “go green” and use an additional hour of labor to save a gallon of gas, your competitors will drive you out of business. “Going green” only makes sense for a firm with some monopoly power and public-relations needs.
4. The best thing to do to satisfy the Green ideology is to choose the lowest-cost production method. Chances are, over time this will use less carbon fuels, and you can claim that your latest methods are “greener,” when you are only doing what you would have done, anyway.
5. The next best thing to do is something very visible but only slightly inefficient. Secretly choosing an inefficient production process that cuts down on carbon emissions is not as good as doing something that has almost no impact on carbon but which is highly public. Burn coal in your manufacturing plant, but have your delivery trucks run on ethanol–and paint the trucks in striking colors that say “eco-friendly.”
6. When you choose an inefficient production process in order to be “green,” you are second-guessing market prices. You could easily go wrong. The input that you substitute for a carbon-based fuel could turn out to be produced by a carbon-intensive process. You have to substitute your scientific and engineering judgment, as well as economic computations and ethics, for what market prices are telling you to do. For all we know, the all-in carbon footprint (taking production methods into account) could be bigger for a Prius than for a Camry.
Once you stray from using market prices, you can have all sorts of unintended consequences. How many gallons of fresh water should you be willing to use up to save a pound of carbon emissions? Do you know how much more water is used in the manufacturing of biofuels compared with the refining of gasoline? The whole point of market prices is to do these calculations for us.
7. In theory, if government planners knew enough about the scientific, engineering, and economic properties of the economy, they could come up with the right tax on carbon fuels. Even though they do not know these things, the planners probably would be better off guessing on a tax than doing something that assumes even more fine-grained knowledge.