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Tuesday, January 23, 2007

Global Warming and Bush -- A Market-Based Solution

For the first time in history, the House Sergeant of Arms will announce, "Madam Speaker, the President of the United States," tonight at the State of the Union. I haven't seen anyone make that point yet and I wanted to get in first.

As President Bush goes into the SOTU, his presidency is trouble. Only 28% approve of Bush's handling of his job, a new low in the CBS News poll tracking his approval. His big 'troop surge' idea isn't all that popular either -- 66% oppose it.

Not surprisingly, Bush is expected to focus on domestic concerns in his address. Mostly because Iraq is such a mess and he really doesn't have any idea as to what to do. When nothing you do is popular, the only thing to talk about is all the stuff you want to do. What's past is past, let's look forward to the future.

Among the things he's expected to address is global warming. So far, Bush's environmental record has been awful. The problem with Bush is his belief that if there isn't a military solution to a problem, there's a market-based one. Thinking back, I sometimes wonder if he doesn't regret not taking a market-based approach to Iraq -- how much do you think it would've taken to get Saddam to sell us Iraq? In purely monetary terms, it probably would've been cheaper.

So expect tax incentives and subsidies for things like ethanol and biofuels, not carbon caps and regulation. Tax incentives and subsidies work so well -- like how Bush proposed that we invest in fuel cells and we all drive fuel cell cars now.

Of course, Bush's love of the market his driven mostly be his love of corporations. And those corporations are starting to come out in favor of new regulations and mandatory caps.

San Jose Mercury News:

The growing consensus to take national action against climate change received a major boost Monday when 10 leading U.S. corporations - including General Electric, Alcoa, DuPont and Pacific Gas & Electric - launched a coalition with four environmental groups to push for mandatory federal emissions controls.

The corporate leaders, spurred in part by Gov. Arnold Schwarzenegger's unilateral proposal to cut greenhouse-gas emissions in California, pledged to work for specific targets and timetables to reduce current levels of carbon dioxide and airborne pollutants by 60 to 80 percent over the next 43 years.

"Action is not only justified, it's critical - greenhouse-gas emissions are rising at an unprecedented rate," said Peter Darbee, CEO of San Francisco-based PG&E, which provides energy to 5 percent of the U.S. market.

If you've been reading my posts for a while, you'll know that I've been arguing that global warming will be bad for business for some time now (specifically, here and here). Not surprisingly, the first industry to start getting noisy about it were insurance companies -- storms and flooding are bad for that business.

Caps will be necessary, but the market-based approach will need to be addressed as well. All of Bush's ideas are probably going to be on the supply-side; i.e., focused on producing, not consuming. But consumers drive our economy -- people don't buy things simply because they're produced.

What you need to do is create a market for the product. Government can do this by guaranteeing a market for alternative fuels. Back in the eighties, the State of Wisconsin passed a bill that would require the state to prefer recycled paper over other paper. At the time, there weren't a lot of companies producing it. But, since the state had to buy it where it was available, companies were guaranteed a market. Wisconsin, a leading producer of US paper, became a leading producer of recycled paper. If companies know for a fact they can sell something, they'll produce it.

The US government can do the same thing with alternative fuels. If there's a reasonable alternative, government would have to use it. Fleet cars and trucks could run on ethanol or biofuel. Facilities that produce their own power (and government has a lot of them) would use alternatives where available. A huge market could be created literally overnight, just waiting for someone to produce the goods that government has to buy.

If you want to use the market, then use the market. Concentrating on the supply-side does nothing if there's no demand.


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