The Economic Benefits of Addressing Climate Change

Great news for us Keynesians

In a report released on June 6, 2008, the International Energy Agency claims a serious effort to combat global warming will cost $45 trillion. I happen to think this is an underestimate. But the idea is very good. And if we run the global economy with sound economic policy, such a project could lead to the greatest prosperity in human history.

The report by the Paris-based International Energy Agency envisions a "energy revolution" that would greatly reduce the world's dependence on fossil fuels while maintaining steady economic growth.

"Meeting this target of 50 percent cut in emissions represents a formidable challenge, and we would require immediate policy action and technological transition on an unprecedented scale," IEA Executive Director Nobuo Tanaka said.

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The scenario for deeper cuts would require massive investment in energy technology development and deployment, a wide-ranging campaign to dramatically increase energy efficiency, and a wholesale shift to renewable sources of energy.

Assuming an average 3.3 percent global economic growth over the 2010-2050 period, governments and the private sector would have to make additional investments of $45 trillion in energy, or 1.1 percent of the world's gross domestic product, the report said.

When I wrote Elegant Technology in the late 1980s, the organizing theme was that job #1 was to use our natural energy capital (fossil fuels) to build a society that could run on the energy income we could harvest from the sun. I discussed class theory, tool development, industrial conversion of militarized production, and especially political economy. Everything—social organization, education, finance, political institutions, and other cultural manifestations had to be harnessed in such an effort—so important was this project.

Of course, if humanity is going to attempt to completely rebuild the industrial umbilical chord that sustains our lives, we might was well take care of the other problems of early-stage industrialization—toxic waste, resource depletion, mining the soil for crops, WATER, etc. etc. No shortage of scope on this project! (Elegant Technology was about 110,000 words long and I thought I was coming to the point!)

Of course, like any large building proposal, eventually the question WILL be asked, “How much does your plan cost?” Anyone who has ever bid out a large project will tell you that there really is no way to KNOW the answer to this question—any answer is only an educated guess. But essentially there are two strategies.

1) You can count very carefully all the known parts—tool acquisition, raw materials, labor, etc. Add up these expenses and multiply by some random factor that reflects the culture—levels of corruption, poor contract performance, haggling, etc. and there’s your bid. Very tedious to do it this way--although CAD/CAM programs that keep track of materials lists have made it simpler. All the builders I have ever met HATE bidding like this because it requires so much investment of time and energy--with a real possibility you don’t even get the job.

2) Guys with a lot of building experience usually resort to bidding by analogy. They look at a set of blueprints and reason—this looks a little like a build we did 5 years ago, it cost us $250 a square foot to build, this building has 100,000 square feet, so my bid will be 25,000,000.

Bidding by analogy has several advantages. It is quick and reasonably accurate. More importantly, it demonstrates expertise. Let’s say you are a client. You have in your hot little hands a set of drawings created at some expense by an architect whose beautiful presentation has you all excited by the prospect of a beautiful new building. The guy who greets you takes a quick look at your prints, looks to see if there is something expensively unique, punches a few numbers on his handheld computer, smiles and says, “Yeah, we do this sort of thing on a regular basis. Here’s a sheet with the addresses of buildings like yours. Check them out for building excellence. Oh, and you should expect to pay something within 20% of 25.6 mil.” The rest of the conversation is just small talk.

Of course, the builder will look at the plans more carefully looking for expensive problem areas so if the contract looks likely, he will do a complete take-apart bid. But usually an analogy bid is well with the ballpark. I know builders who never do any other kind—at least until money changes hands. The reason analogy bidding works so well is that even a take-apart bid has to calculate the costs of random events. The best advice I ever heard about the historic preservation business was, “figure your project down to the last dime and then multiply the time required by two and the costs by three.”

So when the time came to answer the how-much-would-this-cost question for Elegant Technology, I had to make an analogy calculation. In those days before Google, a take-apart calculation was essentially impossible anyway. I had spent 10 years of my life learning how to do analogy bidding in the historic preservation business, so I was comfortable with the process. My big problem was that I had never rebuilt the entire industrial infrastructure of a continental-sized nation, so I was missing the critical element of experience necessary to do a real analogy calculation.

Even so, I had plenty of resources. I had just spent over 7 years trying to answer the question: Is an environmentally sustainable industrial state even possible? I had spent much of my life in an industrialized agrarian environment where issues of energy use and economic development were very much out in the open. I had experienced the USA patent system and understood the long and winding road between an idea and a useable product. And I had a pretty good idea how large projects are organized. It may not have been first-hand experience in a real industrial conversion project, but as any inventor can tell you, everything in human history was first produced by someone who had never done it before. Of course, there must be relevant experience. But if the Wright brothers could go from making bicycles to airplanes (an astonishing relevant transition of expertise, BTW), I figured I had enough relevant knowledge to take a good swipe at estimating what a total industrial conversion would cost.

Estimating the time required was the easy part. It took 66 years from the Wright Flyer until the moonwalk. Assuming a more focused effort, industrial reconversion, with a great effort, could probably be accomplished in 50 years. Nice round number. Go with it.

Estimating the cost was much harder. I just wanted to be within a couple orders of mathematical magnitude—not be close enough to bid an executable contract. But even this was hard. Fortunately during my research for Elegant Technology, I had discovered Veblen’s mighty analytical tool—Institutional Analysis. So these were my Institutional assumptions:

1) Industrialization was the process of embedding energy consumption into EVERYTHING we do (even sex when you think about it—whether you drive to a fancy restaurant that uses imported ingredients to warm up the night or merely use a condom, you have used some fossil fuels.) “Everything” is a big universe.

2) Industrial conversion will be harder than industrialization in the first place--the way that historical preservation is orders of magnitude more expensive than the original project. (Example, the Veblen farmhouse restoration cost well over $1,000,000—the original, less than $1000. Even adjusting for inflation, that’s a LOT of difference!) There are manifold reasons why this is so, but the biggest is that existing industrial infrastructure is owned by people who want it to keep making money. So whatever industrialization cost in the first place, it is going to be MUCH more expensive to replace.

3) If energy use is embedded into everything we do, it is safe to assume at least 25% of the total economy is the energy part. That includes the energy cost itself plus the activities and planning required to use it.

4) Because unused industrial capacity is so widespread, a large project would be beneficial to the global economy—especially if the project included building a way to run the society on energy income instead of depleting the natural capital. A project that would add 25% to current economic activity could be easily absorbed.

At the time, the USA was about an $8 trillion economy per year. 25% of that was $2 trillion. 2 x 50 years = $100 trillion. So that was the figure I used in Elegant Technology. Or would have. See, a number like $100 trillion tends to give folks the vapors. It certainly worked that way on my editor/publisher who pleaded with me to cut it. The evidence is written on the original manuscript.

But blank stares and editorial opposition have not shaken my conviction since then that $100 trillion is still a good starting number. “Two trillion a year for 50 years” has become a part of my verbal furniture. So it is with open arms I welcome the IEA report. $45 trillion is so close to my old calculations, they are virtually identical. I feel like the cavalry has just appeared on the horizon.

Even though the IEA cost analysis is their version of a take-apart bid, it still must be subjected to some fudge factors. I believe they would do well to use the rule of thumb of the historical preservationists and multiply their timeline by 2 and their costs by 3. After all, corruption alone could easily double their cost estimates. But these are minor quibbles.

The most important element in solving any problem is to accurately define it. And crucial to defining a problem is understanding how big it is. $45 trillion is a good number and proves the IEA employs serious people. It is time to bury that most pernicious of environmental nonsense—that there 50 easy ways to save the planet. No, there are not. Saving the planet will be VERY difficult and VERY expensive.

And for us old Keynesians, that is the best news of all.

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Similar pages and video

The direct link to the Elegant Technology .pdf file.

“Creating Prosperity” which highlights the differences between the current economy and the one some of us fondly remember from 1970. (VIDEO)

The jump-off point for the intellectual tributes to Thorstein Veblen (1857-1929)

The Greatest Generation--economics division. Why economics used to be better.

Economics: A Matter of Life or Death--a thumbnail sketch of the difference between finance and industrial capitalism