I’ve been reading The Checklist Manifesto: How to Get Things Right by Atul Gawande. Gawande has a world-class resume, to put it mildly: He’s a surgeon, a teacher at Harvard Medical School, a staff writer for the New Yorker and a MacArthur fellow. The Checklist Manifesto is a provocative look at why we make mistakes, and how to avoid them, and while it’s mostly about medicine, Gawande also writes about the construction industry, a Boston restaurant, aviation, and how Walmart and FEMA responded to Hurricane Katrina. He doesn’t write about energy and climate, but reading the book reminded me why our efforts to decarbonize our economy aren’t working. It’s not just because they are half-hearted.
By now, the stories of FEMA’s failure and Walmart’s success in the aftermath of Hurricane Katrina are well known. Walmart responded nimbly, reopened stores quickly, and provided food, water, ice, diapers, baby formula and medical supplies to those in need. FEMA did too little too late. A 2005 FORTUNE story ran under the headline: The only lifeline was the Walmart. The Kennedy School of Government did a 2007 case study about Walmart and Katrina.
But the lesson of the story is not well understood, as Gawande writes:
Some have argued that the episode proves that the private sector is better than the public sector in handling complex situations. But it isn’t.
As he goes on to say, numerous New Orleans businesses, including the local utilities and oil companies, were ill-prepared for Katrina, and responded inadequately, while some local policy and fire fighters performed very well.
The real lesson, instead, is about centralization and decentralization, about top-down management and entrepreneurial initiative and, at heart, about a knowledge problem. As Gawande writes:
No, the real lesson is that under conditions of true complexity—where the knowledge required exceeds that of an individual and complexity reigns—efforts to dictate everything from the center will fail. People need room to act and adapt. Yet they cannot succeed as isolated individuals either—that is anarchy. Instead, they require a seemingly contradictory mix of freedom and expectations.
This company will respond to the level of this disaster. A lot of you are going to have to make decisions above your level. Make the best decision that you have with the information that’s available to you at the time, and , above all, do the right thing.
By contrast, a rule-bound, top-down, centralized culture paralyzed FEMA. Federal, state and local governments argued over who would do what.
“The result,” Gawande writes, “was a combination of anarchy and Orwellian bureaucracy with horrifying consequences.”
This is why great organizations—whether public or private—tend to push decision-making down, away from the central office and into the field.
Those at the top may be smarter and more experienced than those in the field but dispersed, decentralized decision making works better because, as the 20th century Austrian-born economist Friedrich Hayek wrote in another context
there is beyond question a body of very important but unorganized knowledge….the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation.
In a 1945 essay called The Use of Knowledge in Society, Hayek argued against a system of central economic planning that, however well-intentioned, relies on imperfect knowledge. Instead, he said, economies are most efficiently shaped by market forces, as the changing prices of goods and services communicate signals which enable individuals to adjust their behavior.
In the lecture delivered after he won the Nobel Prize in economics in 1974, Hayek wrote:
The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
Can you see the relevance to climate and energy policy? To reduce greenhouse gas emissions, we need to encourage energy efficiency and, more important, a shift away from fossil fuels that emit lots of CO2 to low carbon energy. We can try to manage the process centrally—which is what the government is doing in a scattershot and inefficient way—or we can allow the price system to work for us by imposing a price on carbon dioxide emissions.
The U.S.’s current policy has given us a dizzying and overlapping array of subsidies, tax breaks, mandates and loan guarantees for corn ethanol, solar panels on rooftops, centralized solar thermal plants, wind power, hybrid and electric cars, weatherization and efficient appliances. CAFE standards are laid down to make cars more efficient. Renewable portfolio standards are imposed at the state level.
To borrow a ideafrom the department store merchant John Wanamaker — who famously said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half” – we can be confident that many of the subsidies targeted at clean energy are wasted but we don’t know which ones. (Actually, we can be pretty sure that the money poured into corn ethanol has been wasted, but that’s another story. And I’ve written about the silliness of building too many wind farms in the wrong places.)
If we put a price on carbon, either through a cap-and-trade system or a carbon tax, people throughout the economy would react in their own ways to higher prices for fossil fuels. Some might choose to buy more efficient appliances, or weatherize their homes, while others would move closer to where they work or plunk down extra money for a hyperefficient electric car. Utilities would decide whether to build nuclear plants or wind farms or power plants that burn natural gas instead of goal.
Collectively, those decisions would lead us to the most efficient low-carbon energy choices.
Money would still be wasted, of course, as it always is when individuals and businesses make poor judgments, but those who make the mistakes would suffer the consequences. By contrast, when the government makes bad bets, we all pay the price.
Yes, I know the politics of climate are difficult, and the politics of taxes even more so.
But the carbon tax could be made revenue-neutral, and rebated to people either directly (the so-called cap and dividend plan proposed by US Sen Maria Cantwell, among others) or applied to lower payroll taxes (which would lower the cost of employing people and therefore help create jobs).
That way, we’d get more of what we want (jobs and income) and less of what we don’t (global warming pollution).
It’s simple, fair, market-based and smart.