Friday, December 18, 2009

Exchange on Costs of Middle East Oil Importation

A reader posts below:

>Let me agree with everything that you say about climate change. But please answer this question: Do cars use oil and do they emit carbon dioxide? If they do use oil, is it not beneficial for us to reduce our consumption so that American wealth is not transferred to the Middle East?

My response:

>I am not opposed to limiting pollution or reducing oil consumption. These can be done with rather than against natural market processes and so limit the dumb mistakes that governments inevitably make.

Murray N. Rothbard had an argument that I found interesting. In the 19th century there were court cases where citizens claimed that pollution was a form of battery and tried to obtain damages from the polluters. The courts threw out this argument. At the time, there was likely a utilitarian argument in favor of pollution, but the judges' decisions (I have no citations) were not fully consistent with the fundamental approach to rights used in the Declaration of Independence. The rights to life, liberty and the pursuit of happiness do not imply the right to harm others. Judge Richard Posner has written a textbook on law and economics in which he argues that judges have acted to optimize efficiency. This is a utilitarian argument. If true, the reason for the judges' mistaken belief that encouraging pollution will maximize social welfare is an antiquated view of social welfare. Also, Posner's utilitarian argument is flawed. It may have made sense in the 19th century when development was just beginning, but it needs to be tempered with rights-based concerns. There ought not be an absolutist right to harm others in order to produce social welfare nor should there be an absolutist claim to limit all harm to the environment while the economy declines.

We now know that pollution does harm to us, including causing diseases like cancer. Also, there is tremendous value in a clean environment. A trip to China in 2003 convinced me of that. Because a clean environment is an inseparable good, that is, there is no way to charge people for its use, and as well pollution is an external cost, which means that polluters do not pay, some correctives are needed. There is market failure. But the correctives can most effectively be accomplished through means that support the market system.

The way to balance the costs of pollution with the benefits (e.g., in increased industrial production) is either through a tort system devised by the courts (where the courts establish standards of care and wrong doing that are stricter than today's) or legislation accomplishing the same thing. A moderate cap and trade system where realistic limits on pollution are coupled with the ability to sell rights to pollute is also workable. Such steps will slow economic growth with respect to consumer goods, though, so they need to be done with care.

Similar standards are in place in areas like automobile safety standards. When there is a car accident, the lack of the ability of the car to withstand the crash to some degree contributes to injuries. The question is how far to go to establish standards. If the courts say that all cars should be crash proof the cost of cars will increase exponentially. Congress and the courts have not concluded that cars can be built without regard to safety, but the standards do not appear to be extreme. Industry fought safety belts, for instance, but ultimately rules supporting inclusion of belts were put into effect and they have not been overwhelmingly expensive. There are tens of thousands of deaths each year due to automobile accidents. But I do not hear anyone proposing to criminalize cars. Rather, the Democrats just subsidized the car industry. So why are they subsidizing industry while aiming to impose massize costs via cap and trade? The goal is not limiting pollution but control and power of the state.

With respect to pollution and cap and trade the Democrats do not aim to maximize social welfare or the balance the need for a clean environment with the need for other kinds of progress. For instance, the cap and trade bill as it was originally proposed included, I believe, retroactive standards on homeowners that would have cost each American homeowner thousands of dollars. The standard of raising energy efficiency by 50% over six years seems arbitrary and capricious.

Moreover, there is a willingness to hand decision making to national and international authority (a cap and trade administrator, for instance) which poses a threat to freedom. Instead of talking in terms of costs and benefits and balancing progress with limits on pollution and capricious state authority, the Democrats and environmentalists have an extremist agenda.

The claim of global warming, for instance, has become an obsession with the Democrats and the environmentalist movement. Rather than debate the question intelligently, they have chosen to falsify research. The Democratic media then report the falsified findings as though they are facts. This is evidence of the partisan nature of the Democratic media such as NPR and the Washington Post.

That said, I agree that it is beneficial to us to reduce consumption of anything, including oil. That is efficiency. But buying a resource from another country is not transferring wealth. The reason we buy oil is to produce wealth. In other words, the benefit of the oil exceeds the cost. If the price of oil rises sufficiently, alternatives will be found. But purchasing oil from the Middle East is not so maleficent a result that government is needed to alter market processes. Firms have been much better at innovation than governments. If that were not so, then Sweden, Cuba and North Korea would be innovation centers.

Certainly, there is little in common between the Middle-Easterners-are-demons argument and the claim that there is global warming. I suspect that there will be alternative fuels coming into being as the real price of oil rises. Meanwhile, if you feel that we should rely on alternative fuels, why not study chemical engineering and work on inventing a low-cost alternative? That is what Americans used to do before the advent of paper money and big universities.

1 comment:

Anonymous said...

What you suggested is one way to deal with the incredibly simple dilemma lies at the heart of global warming. It is called an externality. An externality is what happens when someone takes action and someone else pays a price for it. There can be positive and negative externalities.

Can this problem be solved by taxation or cap and trade or asking people to change their behavior -- probably not. Steven Levitt of Chicago suggests the use of science to deal with issues of climate change.

He argues that we should take actions that generate a positive externality. For example, The explosion of Mt. Pinatubo resulted in sulpher dioxide being spewed into the air. The sulpher dioxide acted as a natural screen shielding the earth from the rays of the sun. It was a positive externality. It was shown scientifically that in the years following the explosion the earth cooled.

Levitt suggests the use of geo-engineering solutions to reverse climate change. It is cheap and with quicker results.