A Sensible Approach to CO2

Many people have made up their minds on the issue of global warming and are urging a carbon tax to reduce emissions of carbon dioxide(CO2), the leading greenhouse gas. They're relying on a quotation from a report of the UN's Intergovernmental Panel on Climate Change (IPCC): "The balance of evidence suggests that there is a discernible human influence on global climate." Yet, that's a rather modest and vague finding.

The statement is preceded by a caveat: "Our ability to quantify the human influence on global climate is currently limited because ... there are uncertainties in key factors." The report explains these technical uncertainties. Nevertheless, a large portion of the scientific community concurs with the IPCC's finding. And surely, the massive scale of CO2 emissions into the atmosphere is a source of genuine worry.

The proposed policy response that has gathered most attention is very specific - force CO2 emissions back to the 1990 level. But the costs of meeting the proposed "cap" on CO2 usage would be substantial - ranging from tens of billions to hundreds of billions of dollars a year.

The major energy-using sectors would be hardest hit, notably petroleum refining, chemicals, paper, cement, steel, and aluminum. The electric utilities - most of which use fossil fuel - would be directly affected and, because they serve virtually every part of society, the results of a cutback in CO2 would be pervasive.

IT is not just a matter of high cost, either. There is considerable question whether there will be any net benefit at all. Those CO2 "caps" would be limited to industrialized nations. Developing countries would not be subject to limits on fossil fuel usage for the foreseeable future. Yet global warming is a global problem.

It will be futile to try to respond by curbing our energy use if developing nations more than offset those costly efforts. In the next dozen years, China and India alone are expected to experience greater growth in emissions than the United States, Japan, and Western Europe combined. But, as these developing countries see it, it's unfair to expect them to cap their emissions when their per capita levels of energy use and economic output are so much lower than ours.

One suggestion for a global approach to CO2 emissions is to set up a "trading" mechanism similar to that developed under the 1990 amendments to the Clean Air Act. The notion of "emissions trading" as a way of minimizing costs has great technical appeal to economists. However, emissions trading among nations would constitute a hidden but massive shift of wealth from the economically advanced societies to China, India, and other rapidly developing countries.

All nations would be better off by following a different strategy. Instead of initiating a "crash" program of CO2 emissions taxes and trading, we should encourage investment in the economies of the developing countries. When a nation reaches a certain economic threshold (per capita income of about $5,000 a year), it then can start spending its own money for a better environment.

Moreover, gradually phasing in policy actions will minimize their costs. A crash program would mean prematurely retiring much of our capital stock. In contrast, a gradual transition entails replacing the capital stock as it wears out with more advanced equipment that uses less fossil fuel.

During this transition period, we should take those sensible actions that are desirable for domestic economic reasons and that would simultaneously reduce CO2 emissions. A good place to start is to eliminate tax and budget subsidies that encourage the extra use of fossil fuel, the major generator of CO2. The money saved could be used to expand the monitoring systems needed for the evaluation of climate change.

* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.