It is a commonly repeated urban myth that our capitalist system is to blame for the accumulation of carbon dioxide in the atmosphere. Some environmentalists believe this is justification for creating an omnipotent system of regulation to deal with atmospheric carbon accumulation. This is argued to be a more direct way of reducing carbon accumulation than relying on the market.
In reality, of course, that belief is based on erroneous premises. First, no one seeks to use energy just to be wasteful. Energy is not used for its own sake. That is, energy is not a consumption good that provides users with benefits directly. Rather, it provides users mobility, light, heat, etc. for our homes, transportation, and industrial and agricultural activities—the things that a society wants. In the end, these activities power the economy and yield the gross domestic product that represents the aggregate improvement in well-being that Americans are seeking. Hence, no private sector party actually wants to use energy and emit carbon at all, let alone excessively.
Second, the market economy demonstrably does an exquisite job in rationing the use of energy. A simple look at the trends in economic activity, energy use, and carbon emissions has been very effective in using energy efficiently. In the figure below, we can easily see the evidence of the market’s ability to spare the use of energy in the economy, and with it, produce less and less carbon emissions as it does so. The graphic presents data from the 72 year period from 1949 to 2021. In that time, total GDP in real terms has increased by a factor of 9 times, while the use of energy in the economy has increased by a factor of only 3 times.
Figure 1. Trends in GDP, Energy and CO2
Mathematically, that implies an increase in economic growth of 3 percent per annum on a continuous, compounded basis, versus an increase in energy use of only 1.5 percent per annum. Hence, the energy efficiency of US GDP production has grown in real terms by 1.2 percent per annum, continuously over 70 years.
Meanwhile, the economy has been increasingly sparing of carbon emissions. The so-called energy intensity of the US economy has fallen by a factor of 4 over that same 70 period.
Thus, the tonnage of carbon emissions per dollar of US GDP has fallen by 2 percent per annum on a continuous, compound basis since 1949. It has done this, almost exclusively on its own by economizing on use of carbonaceous fuels and shifting away from more emissive economic sectors.
By implication, any premature acceleration in energy use—beyond the rate at which efficient opportunities are available—would likely reduce GDP. If better efficiency opportunities were available, the profit oriented market would have taken advantage of it. That is, profit seeking would have accelerated even more had doing so not led to the reduction of economic output. Conversely, forcing the reduction in energy use prematurely would have reduced profit and/or output. This is a complex and subtle calculation that only a crowd of private million market participants can make successfully. Government has yet to prove emulate market efficiency through administrative means. Figure 2. US Energy Efficiency Trend, 1949-2049
Climate scientists are urging that reduction in carbonaceous energy use be accelerated. This is to avoid pushing the natural systems that regulate the earth’s temperature beyond a tipping point leaves natural systems in an unstable state. This is a possibility, of course, because the atmospheric temperature is not directly part of the calculus that the private market uses to make its calculations. However, it is interesting to note that admittedly simple projections of tons of CO2 per dollars of real GDP in the future below suggest that the US can reach near zero net carbon before 2050 without government intervention. Indeed, the historic trend suggests that on that track today on its own. Even if that 70-year trend is a statistical artifact, a simple market-oriented nudge by a revenue-neutral carbon tax could be used to accelerate the reduction in use of carbonaceous fuels at least impact to the economy. A recent study by economists at Columbia University confirms that conclusion. Specifically, the use of a revenue neutral carbon tax has the virtue of using the tools of the engine of capitalism—pricing and profit, but without heavy-handed government intervention. Rather, the return of the revenue to the general public in a tax-revenue dividend leaves the wealth of the payers of tax largely undiminished and thus the economy relatively undistorted. Such a tax is in place in British Columbia and has been proposed in the US Congress.
Sources:
Noah Kaufman, et al., An Assessment of the Energy, Innovation and Carbon Dividend Act, Columbia Energy Policy Center, November 6, 2019, https://www.energypolicy.columbia.edu/research/report/assessment-energy-innovation-and-carbon-dividend-act
https://www.un.org/sg/en/content/sg/articles/2020-12-11/carbon-neutrality-2050-theworld’s-most-urgent-mission
