Almost all economists applaud the trade aspect. Paying for permission
to pollute would eliminate a lot of C0 2 emissions that are associated with
low-value-added economic activity. But the critical element of cap and
trade is the overall cap a country is allowed. In principle, a country can set
a cap on total C0 2 emissions. It can auction off or give away "permissions"
adding up to this predetermined limit. Companies that emit less C0 2 than
their quota can sell the unused permits in the open market. Those that
need to engage in C02-emitting activities that cause them to breach their
quota can purchase the needed additional permits in the market.
The effectiveness of any cap-and-trade scheme, however, depends on
the size of the cap. That is its Achilles' heel. For example, the European
Union appeared to have successfully implemented such a program in 2005,
only to find that its cap was too high, meaning it didn't save very much in
total emissions. The European Commission reported in May 2006 that the
EU's original fifteen members would cut emissions by 2010 by only 0.6
percent compared with 1990 levels. The Kyoto Protocol target is 8 percent
by 2012. When that fact emerged, the price of permits fell by two-thirds.
The system inconvenienced very few.
There is no effective way to meaningfully reduce emissions without
negatively impacting a large part of an economy. Net, it is a tax. If the cap
is low enough to make a meaningful inroad into C0 2 emissions, permits
will become expensive and large numbers of companies will experience
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cost increases that make them less competitive. Jobs will be lost and real
incomes of workers constrained. Can a national parliament vote to impose
costs on constituents when the benefits of its actions are spread across the
globe, wholly independently of where the CO z savings come from?
More generally, can a democratic government stand against an accusation
that whatever savings in C0 2 emissions are pressed on its constituents,
they are likely to be more than wiped out by increased emissions coming
from developing countries that were not included in the agreement reached
in Kyoto in 1997? And can developing countries be asked to forgo creating
the carbon emissions associated with economic development? Should access
to "free" pollution permits be shut off only after a large number of countries
have become developed? I doubt very much that a Kyoto-type accord
will bring world agreement on some form of penalty for the emission of
greenhouse gases. Spewing CO z into the atmosphere is as much a violation
of property rights as my dumping refuse into my neighbor's yard. But protecting
such rights and assessing the costs of an infringement are exceptionally
difficult because monitoring the cost is not feasible. Our recent difficult
history with international agreements requiring broad acceptance, whether
in the World Trade Organization, the United Nations, or any other world
forum, makes me pessimistic. Cap-and-trade systems or carbon taxes are
likely to be popular only until real people lose real jobs as their consequence.
Ideally, of course, carbon emissions should be delinked from production
technologically before cap-and-trade regimes are put in place, rendering
the latter unnecessary. Forcing delinkage, which is what caps do, rarely
yields an optimum allocation of resources, as the world's experiences with
central planning have amply demonstrated. Forced cutbacks in output will
doubtless create a political response to curb imports. That process leads to
a gradual reversal of the gains of postwar liberalization. A carbon tax might
not be job-destroying if it were uniform across the globe, but I am skeptical
that such uniformity is even remotely feasible. Unless we find technologies
to delink emissions from output, emissions can be suppressed only through
lower production and employment. If we do find those technologies, emissions
will fall without a cap-and-trade regime. An effective cap-and-trade
regime might be expected to create price incentives for developing new
technology, but the development process would likely be too protracted
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for political comfort. There are no simple or costless solutions to this vex
ing problem.
I fear that a more likely response to global warming will be to quibble
until the dangers it poses to national economies become more apparent—
until, for example, countries are forced to build dikes around vulnerable
cities to stave off rising sea levels and floods. (The Dutch have succeeded
with dikes for centuries; the Venetians have been less successful.) Remedia
tion is far more likely than prevention to garner adequate political and
popular support. It has the advantage that the costs are borne by the same
populace that achieves the benefits. But if there is more to global warming
than flooding (for example, adverse weather), that solution will fall short.
T
T
he preceding analysis leads us to another hard truth: We are unlikely
to wean ourselves fully from traditional petroleum for as long as it
lasts. The call for "energy independence" by President Nixon in 1973 was
political grandstanding, as were similar declarations by subsequent presi
dents. The only meaningful definition of energy independence is world
price leadership based on the availability of extensive, unexploited reserves
in the ground or the type of shut-in excess crude oil that the Texas Railroad
Commission controlled. Petroleum independence from a national-security
perspective, which the United States enjoyed until 1971, is long gone.
How many years will the oil last? Supplies will shrink well before the
end of this century, most experts now say. Of course, pundits have been forecasting
the peak and decline of the production of petroleum since shortly
after Colonel Drake struck oil in 1859 in Titusville, Pennsylvania. Few doubt
that oil will eventually run out. The reservoirs are finite, as is their number.
Crude-oil production peaked in the United States' lower forty-eight states
in 1970, in Alaska in 1988, and in the North Sea in 1999, and output of
Mexico's vast Cantarell field apparently topped out in 2005. Ultimately, all
reservoirs will peak, and few large new ones are likely to be found in the
now thoroughly drill-pocked developed world. There is some promise in
deepwater exploration and development, but such endeavors are costly. Despite
vast investments in exploration and development, proved reserves in
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the nations composing the Organization for Economic Cooperation and
Development have fallen from 113 billion barrels in 1997 to 80 billion barrels
in 2006, according to BP, a most useful source of such data. The most
recent major discoveries were in Alaska in December 1967, the North Sea
in November 1969, and Cantarell in 1971.
Despite all this, calculating the day when conventional world petroleum
will reach peak output is not simple, because technology has continually
increased recoveries from reservoirs and stretched out projections of
when they will finally run dry. The "central-tendency scenarios" of the U.S.
Department of Energy now project midcentury as the point when petroleum
production will peak worldwide.
Well before the geology of oil reservoir depletion takes hold, however,
market forces and consequent price pressures are likely to displace much
of current petroleum use in the United States. If history is any guide, oil
will be overtaken by less costly alternatives well before conventional oil
reserves run out. Indeed, oil displaced coal despite still-vast untapped reserves
of coal, and coal displaced wood before our forestlands were denuded.
Forecasting oil's supply/demand balance by midcentury, or any
other date, is a daunting challenge, but such forecasting is nonetheless a
useful exercise as a first approximation of our energy future.
The experience of the past fifty years—and indeed much longer than
that—affirms that market forces will play a key role in conserving scarce
energy resources, directing those resources to their most highly valued uses.
Market-driven improvements in technology and shifts in the structure of
economic activity are reducing the intensity of the world's oil use, and recent
oil price increases will presumably hasten the displacement of oil-intensive
production facilities. Leaving aside the actions of the Texas Railroad
Commission, the impact of activist policies since the end of World War II
has been minor, and usually overridden by market forces. The imposition
of gasoline rationing in 1973 in the United States merely created embarrassingly
long lines at American gasoline service stations. Although long-
term projections inevitably balance petroleum supply with demand at a
level considerably higher than today's nearly eighty-five million barrels a
day, too many things can be wrong in such projections, and the markets
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sense that.* (Oil pundits, I fear, often do not give Murphy's Law the credence
it deserves.)
In the United States, hybrids that run on both electricity and gasoline
are rapidly gaining share of the light-motor-vehicle market. Over the horizon
are plug-in electric vehicles, now in an exploratory stage. I recently had
an occasion to drive one. My only complaint was that stepping on the accelerator
produced a surge forward accompanied by an eerie and disturbing
silence. I predict that the bestselling models will have an audio system that
simulates the sound of a gasoline engine revving up. People want the comfort
of the expected.
Today, plug-in hybrids or electrics have a niche market. If world turmoil
expands, and with it oil prices, plug-ins are going to look quite attractive.
If we charged them off an electrical grid that obtained its power from
nuclear generation, we would, in addition, remove more C0 2 from the atmosphere
than we could by any other feasible change in the way we live
today. The Department of Energy estimates that without any additional
generating capacity, 84 percent of the 220 million light vehicles on our
highways now, if they were plug-in hybrids, could be charged overnight,
when electricity load factors are quite low. Modest additions to capacity
could accommodate the rest.
As I noted earlier, the ratio of world oil consumption to real GDP, the
most general measure of oil use intensity, peaked in 1973 and has progressed
steadily downward to the current level of less than two-thirds of
*Data on worldwide production and hence consumption are sketchy. The OECD compiles
reasonably good data of industrial countries' production, consumption, and inventories of oil.
But OECD production makes up only a fourth of world output. Production data for most
OPEC members are state secrets. Estimates are made by spotters who count the number and
capacity of tankers leaving ports of export. They observe the vessels' draft in order to estimate tons
on board. By finding out (in part from recipients of the exports) how much the exporters' oil
typically weighs per barrel, the observers are able to convert these tonnage estimates to barrels.
Domestic consumption estimates are added to exports net of imports to calculate pro duction.
Even though such estimates are rough, the International Energy Agency's compiled data
do describe the general state of world oil balances. Half of refinery capacity resides in and is accurately
measured by the OECD. Much of the rest is either reported or reasonably estimated.
The ultimate reconciliation is whether world crude-oil production, after adjusting for crude-oil
inventories, matches estimates of crude-oil inputs into refineries. The discrepancies are smaller
than I would have guessed.
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where it was in 1973. However, developing nations have far higher oil use
per dollar of GDP than developed countries: China and India have twice
that of the United States; Brazil and Mexico, half again higher than the
United States. Thus, even though I expect oil intensity to fall for most if not
all countries, the large shift of shares of the world's GDP from developed
to developing nations (with higher oil intensity) implies markedly less of a
decline in world average intensity than that of the individual countries
viewed separately.
Two powerful economic forces drive the shift in world GDP shares toward
the developing world. The first is demographic—the great mass of the
world's younger workers live in developing nations. The second is productivity
growth fostered by the shift to free-market capitalism. As I note in
the concluding chapter of this book, developed nations, by definition at the
cutting edge of technology, need new innovative insights to boost productivity.
Developing nations generally can upgrade just by adopting existing
technologies. Taking all this into account, the International Energy Agency
(IEA) estimates world petroleum consumption growth at 1.3 percent per
year on average between 2005 and 2030. The U.S. Energy Information Administration
(EIA) projects 1.4 percent.
There is certainly enough oil in the ground to meet a rise in world oil
demand from 84 million barrels per day in 2005 to 116 million barrels per
day in 2030, the IEA's projection. But will OPEC members, penciled in by
the IEA to supply nearly half of the increase, be willing to do so? It is possible.
Their populations are growing rapidly, generating an ever-growing need for
cash in government budgets and thus increased oil revenues. And it is perfectly
plausible that the Iraq insurgency will end and that Iraq will generate
more than 5 million barrels a day from its vast untapped reserves, as the
EIA projects (up from 2 million barrels per day in 2006). But too many things
