Climate policy and The Black Swan

How we do we live in a world we don’t understand? That question has been on my mind lately because I’m again under the sway of Nassim Nicholas Taleb, author of The Black Swan. Taleb did a podcast recently with the free-market (or, if you prefer) the Smith-Hayekian) economist Russell Roberts, available here at EconTalk and highly recommended.

They didn’t discuss climate policy but their conversation got me wondering what Taleb would say about the threat of climate change, particularly since I’ve been thinking about how to respond to a thoughtful commentary on climate and energy by Jesse Jenkins of The Breakthrough Institute, who blogs as Watthead, Jesse and I serve on the blogger board for The Energy Collective, a website that attracts people who are interested in the nitty-gritty of energy and climate policy. It’s a good place to keep up with people like Joe Romm and Robert Stavins.

In his post, Jesse argues in his post that a cap-and-trade policy or carbon tax designed to “put a price on carbon” – that is, to raise the cost of burning fossil fuels – won’t do nearly enough by itself to reduce greenhouse gas emissions and respond meaningfully to the threat of climate change. That’s because any policy that drives prices high enough to discourage people from burning coal and oil will, by definition, be politically unpopular. Jesse writes:

The ultimate effectiveness of a strategy premised centrally on an effort to make dirty energy more expensive will always be limited by this fundamental reality of the political economy of energy — which we at the Breakthrough Institute have dubbed “Global Warming’s Gordian Knot.” If the price of carbon must rise too high to drive emissions reductions, various cost containment mechanisms or public backlash will kick in — either of which effectively abrogates the emissions cap. Yet if we constrain the price of carbon, it will have very little impact on emissions absent a steady supply of low-cost emissions reductions opportunities.

Instead of trying to make dirty energy expensive, Jesse argues, we need to make clean energy cheap. This requires what he calls “a coordinated, well-funded and effective strategy to accelerate clean energy innovation and drive major improvements in the price and performance of clean energy technologies.” Yep, that means lots of government spending, perhaps $50 billion a year.

What does this have to do with Taleb? I’m wary of trying to summarize his worldview but Taleb essentially argues that we know a lot less than we think we know. “My major hobby,” he writes on his website, “is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the courage to sometimes say: I don’t know….”  In essence, Taleb says we are not very good at understanding the past or present – his first book was called Fooled by Randomness–and that we are downright horrible at predicting the future. (Although he sort of predicted the global financial meltdown.)

I don’t know what Taleb thinks about climate policy or, for that matter, climate science, but I suspect that he would not have much enthusiasm for a federal government effort to spend $50 billion a year to research and commercialize technology to make clean energy cheap. None of us know  how to make clean energy cheap, and the government has a pretty poor track record of picking marketplace winners.

Here are several examples. In 1980, President Carter signed legislation to establish the U.S. Synthetic Fuels Corp., to find ways to create alternatives to petroleum and promote energy independence. It flopped, of course, and one reason why is that it got caught up in pork-barrel politics. “Fuel-cell projects under the SFC, for example, were allotted to each of the 50 states, regardless of economic viability,” according to a book called “The Government Role in Civilian Technology,” by the National Academies of Science and Engineering and the Institute of Medicine.

Not long ago, Congress gave us FutureGen, the “public-private partnership to design, build, and operate the world’s first coal-fueled, near-zero emissions power plant, at an estimated net project cost of US $1.5 billion.” Well, good luck with that. An environmentalist pal of mine likes to refer to FutureGen as NeverGen.

More recently, we had the biofuels mandate in the 2007 energy bill, which was a boon to Midwest farmers and the corn ethanol industry, at least until oil prices dropped last year and big ethanol refiners went bankrupt. The politics of biofuels are incredibly complicated – the mandate was opposed by environmental groups like Friends of the Earth and by oil-state Republicans – but figuring out which biofuels make economic and environmental sense and which do not is no job for Washington.

Only markets will do that.

Now let me be clear. I am not arguing that venture capitalists or energy startups or academics or big oil companies are any smarter or more capable than U.S. Senators or DOE researchers. What I am saying is more voices (i.e., the market) are better than a few (politicians and civil servants). The way to make clean energy cheap is to create a market that promotes as much tinkering and experimentation by as many people are possible (crowdsourcing, if you like) and not by giving the government $50 billion a year to spend. Nobody knows today how to make clean energy cheap. Together we may be able to figure it out.

Best as I can tell, the best way to unleash that experimentation is with cap-and-trade or a carbon tax, by making dirty energy expensive. Ideally, by making it very expensive. This is logical and just. So long as we allow the fossil fuel industry to dump global warming pollutants into the air at no cost, that’s what the industry will do, and future generations will pay a terrible price. Better to pay more for electricity and gasoline today, right?

The question remains, how can environmentalists and their political allies persuade people to pay more for fossil fuel energy in the short run? Americans haven’t been very good lately at making sacrifices today for the sake of future generations. But with the right leadership, that can change.

One way to begin is to get our metaphors right, as Steven Chu, the new energy secretary, has argued.

Some people have said the clean energy revolution will require a national effort like the Manhattan Project or the Apollo project to send a man to the moon. Wrong—those were government-funded efforts, involving small numbers of people, aimed at a very specific goals.

Here we have a much broader goal—cheap clean energy—but no clear path to get there. Will it be wind, solar, wave or geothermal power, or clean coal, or nuclear power, or all of the above? What we need—and all credit to Chu for this metaphor—is something more like the mobilization of the U.S. economy during World War II, which involved everything from Victory Gardens (local food!) to energy conservation (“Don’t Travel—Unless Your Trip Helps Win the War”).

Put simple, the best way to untie the Breakthrough Institute’s Gordian Knot is with politics. We need to persuade people that it’s worth paying more for dirty energy today to save the planet for our kids and grandkids.