Taking action on climate change

Update: Krugman expanded on the job creation point in his column.

The Obama administration is side stepping congress and finally doing something about climate change.  The "action plan" has a nice outline of strategies, but no specifics.  It will be interesting to see what kinds of rules the EPA and DOE roll out in response to this initiative and how they will be justified under existing laws like the Clear Air Act.

Precedent for this kind of action was established by the Supreme Court awhile back.  If the Obama administration didn't take action soon, agencies would be sued by environmental groups and forced to do something.  So this kind of thing was bound to happen, one way or another.

In response, Paul Krugman makes an interesting and surely controversial point.  The new rules, whatever they turn out to be, will make energy more costly.  That's not to say action shouldn't be taken, but that there are tradeoffs involved with curbing climate change.  Krugman argues, however, that because these are not ordinary times, the costs may be considerably less.  Indeed, these rules may actually benefit the rest of the economy, not hurt it.  In other words, action on climate change could be free lunch.

Yes, this violates one of the first principles of economics.  But that sort of thing might actually happen when we have a depressed economy and vast inefficiency to begin with.  His reasoning is that we have too little demand right now, so that investments into alternative energy or carbon capture would employ resources that would otherwise sit idle.  And once those idle resources are employed, the economic activity they would generate would grow real income.  Put another way, since aggregate demand is insufficient, investments to curb global warming do not displace other kinds of investments and instead just add to GDP.

Environmental economists don't think this way, probably because depressed economies don't happen very often, and so the field pays little attention to macroeconomics.  But since the economy is depressed and likely to stay that way for at least another year or two, it does seem like a good time take action. After all, as Krugman likes to remind us again and again,  the latest evidence shows Keynesian ideas to be stronger than ever.  Let's eat that free lunch while we can.


  1. I would argue that the costs aren't actually being increased. They are being reallocated. Externalities, like environmental damage, are costs, but they are not reflected in the price the consumer pays, nor in the profit/loss of the business entity that develops a resource.

    By bringing the externalities into the nominal cost structure, the market can operate more efficiently. If people had to pay the full price of coal or gasoline alternatives would appear a lot more attractive, and vehicles would be much more efficient.


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